Market in Depth

Argentina defaults again; currency controls to hurt the housing market further

Lalaine C. Delmendo | October 03, 2019

Argentina has been here before – not once but several times!

In 1989, Argentina experienced a period of hyperinflation, with annual inflation reaching almost 5,000%. Combined with power cuts, this led to the downfall of Raul Alfonsín's presidency. A similar crisis in 2001 forced another president, Fernando de la Rua, to vacate his seat, leading to what is now considered the largest ever sovereign default, amounting to US$95 billion.

After experiencing robust growth of 6.4% from 2003 to 2011, Argentina suffered another crisis under populist leader Cristina Fernández, forcing it to default again on its debt in 2014. Stubbornly high inflation persisted and the peso lost more than 50% of its value from 2012 to 2015.

Now the economy is in recession once more, after a short-lived recovery. Mauricio Macri's popularity is plunging. Inflation is skyrocketing. The peso has been crashing. The government deferred payments on roughly US$100 billion of debt last month, which led Standard & Poor's and Fitch Ratings to downgrade the country's credit rating to “selective default” and “restricted default”, respectively.

Argentina's economic and financial turmoil is now jinxing the country's property market. In August 2019, property prices in Buenos Aires fell by 2.5% y-o-y to US$2,333 per square meter (sq. m), based on data published by Clarín. When adjusted for inflation, prices actually plunged by a whoping 37%.

Demand is now at its lowest level, with property sales transactions in Buenos Aires falling for 14 consecutive months. In fact in the first seven months of 2019, sales plummeted 47.5% to 18,783 units from a year earlier, according to an article by using data from the Colegio de Escribanos de la Ciudad de Buenos Aires.

“If everything continues as before, the projection of property sales transactions [in Buenos Aires] for all 2019 is about 30,000. That figure is even below 2001, the lowest level so far, which was 36,000,” said Claudio Caputo, the president of the College of Notaries of the Autonomous City of Buenos Aires. “This is going to be the worst year of history for the real estate sector.”

Argentina average price residential properties
Things are expected to get worse, after the government implemented currency controls in early-September 2019, effectively limiting the purchase of US dollars to just US$10,000 monthly. This measure is expected to paralyze the housing market.

“The main issue in Argentina is that the real estate market has historically been transacted in dollars so when you make it impossible for people to source dollars liquidity gets disrupted,” says Bret Rosen, managing director of research at Jamestown Properties LLC in New York.

Analysis of Argentina Residential Property Market »

Rental Yields

Buenos Aires, Argentina: rental yields poor

Gross rental yields on apartments in Buenos Aires are poor, especially by the standards of the continent (yields in Latin America tend to be high). The typical gross rental yield on an apartment in Buenos Aires - the rental return earned on the purchase price, before taxation, vacancy costs, and other costs - isn´t something that will attract foreigners to invest, even if they could get a mortgage in Argentina, which they won´t be able to.

Yields on apartments in Buenos Aires range from 1.8% to 3.5%. As always, rental yields are higher on smaller apartments. Given that a typical landlords' expenses are around 2% per annum in maintenance, repairs, empties, etcetera, this means that many landlords will effectively earn nothing.

Round trip transaction costs are quite high in Argentina (i.e., the total costs of buying and selling a property).  See our Argentina residential transaction costs analysis and Residential transaction costs in Argentina compared to the rest of Latin America.

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Taxes and Costs

Rental income taxes are
punitively high in Argentina

Rental Income: Rental income is taxed as regular income. For nonresidents, the tax is 21% of the gross annual rent. In addition, rental values exceeding ARS1,500 (US$52) per month are assessable for VAT at 21%, except for rentals of residential properties, properties rented to the Argentine State or rural properties affected to farming activities.

Non-residents also pay a tax on Personal Assets, Real Estate Tax and other charges.

Capital Gains: Sale of real estate properties is subject to capital gains tax at a flat rate of 15%.

However, capital gains earned by companies are subject to corporate income tax at the rate of 30%.

Inheritance: There are no inheritance or gift taxes in Argentina. except for an inheritance tax levied on properties located in the province of Buenos Aires.

Residents: Individuals who are residents of Argentina are liable to tax on their worldwide income at progressive rates, from 5% to 35%.

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Buying Guide

Low transaction costs but with several complications

The total roundtrip transaction cost is between 9.93% and 11.64% of the property’s value. This includes notary fees (1% to 1.50%), stamp tax on property sales (3.60%), and the real estate agent’s fee (3% to 4%, plus 21% VAT).

For middle to high-end real estate, property transactions are done in US dollars with the amount paid in cash. However, getting US dollars is costly. It is possible to lose 1% to 2% of money value going through the official conversion process.

Read Buying Guide »

Landlord and Tenant

Pro-tenant rental market

Argentina’s rental market is pro-tenant.

Rents: Rents can be freely negotiated. Rent must be payable on a monthly schedule and cannot be indexed for inflation during the lease term.

Tenant Eviction: Amendments approved in 2002 have greatly shortened the time for landlords to recover property from non-paying tenants. Tenants can only be evicted through judicial proceedings, even at the end of the lease period.

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Economic and financial woes worsen

Macri’s and Argentina’s problems stem from the adoption of tough IMF-mandated policies to stem the rocketing inflation which was the legacy of the previous administration.

Immediately after taking office in December 2015, President Mauricio Macri began to reverse the economic legacy of populist former president Fernández, including devaluing the currency and lifting tight capital controls.

President Macri also ended Argentina's 15-year long default status by repaying the so-called "vulture funds" that sued it over nine billion U.S. dollars in defaulted bonds. Putting an end to the debt saga to regain access to global credit markets was a key campaign promise in 2015 elections.

Argentina gdp growth
Last year, Argentina received a whopping US$57 billion loan agreement with the IMF – the organization’s biggest ever aid package – aimed at shoring up the country’s ailing finances. The loan, US$44 billion of which has already been disbursed, comes with stringent conditions, including a commitment to a zero deficit for 2019.

On October 1, 2018, the BCRA introduced a new monetary policy scheme to cut the amount of pesos in circulation, in an effort to tame inflation and stabilize the peso. The new rule sets a zero monthly growth target in the monetary base by means of conducting daily transactions of Liquidity Bills (LELIQs) with banks. This means that the benchmark interest rate is set by the supply and demand of liquidity,  to move in the direction of zero nominal growth in the monetary base.

However the actual result of these policies has been a dramatic economic contraction, combined with higher inflation – due to the drop in the currency combined with economic austerity.

The economy contracted by 5.8% in Q1 2019 from a year earlier, following y-o-y declines of 6.1% in Q4 2018, 3.7% in Q3 2018 and 3.8% in Q2 2018, according to the National Institute of Statistics and Censuses (INDEC). In fact the last two quarters marked the biggest contractions since Q2 2009. In a quarterly basis, GDP fell by 0.2% in Q1 2019, after falling by 1.3% in the previous quarter.

The country’s budget deficit stood at 5.5% of GDP last year, following shortfalls of 6.1% of GDP in 2017, 4.6% in 2016, 5.4% in 2015, and 3.8% in 2014. Government debt ballooned to 86.2% of GDP in 2018, from just 56.6% of GDP in 2017, mostly because of currency depreciation.

Argentina’s stubbornly high inflation is a serious problem, not least for the housing market. In August 2019, nationwide inflation rate stood at 54.5%, sharply up from 34.4% a year earlier and one of the highest in the world, largely due to lifting currency controls. Banks are unwilling to lend in these circumstances.

The government expects the economy to shrink by 2.6% this year – but this might be an optimistic projection given the country’s worsening financial crisis.

The state of the economy has had inevitable political consequences.  In the primary poll conducted August 11, 2019, Mauricio Macri lost to Peronist candidate Alberto Fernández – an indication that Macri’s bid for reelection in October now appears in serious jeopardy.

Macri’s surprise poll defeat caused the value of the peso to plunge by 20% a day after the poll.  This forced the government to postpone payments on some short-term maturities and to seek a “voluntary reprofiling” of longer-term debt, which led the Standard & Poor’s and Fitch Ratings to downgrade the country’s credit rating to “selective default” and “restricted default”, respectively.

Argentina immediately re-imposed currency controls to shore up the peso and protect its depleted foreign exchange reserves.