Index-linked mortgages transform Argentina's housing market
February 20, 2018
Buenos Aires old dwellings prices surged by 16.5% in dollar terms, and prices of new dwellings went up by an average of 10% during the year to August 2017, according to a 11,000 apartment survey by the Economics Institute of the Faculty of Economic Sciences of the Argentine University of Business (UADE).
- In Belgrano, the average price increased by 10.1% y-o-y in August 2017
- In Palermo, prices increased by 9.4% y-o-y
- In Núñez, prices increased by 7.7% y-o-y
- In Recoleta, prices increased by 5.9% y-o-y
- In Núñez, the average price of old dwellings sharply increased by 16.5% y-o-y in August 2017
- In Belgrano , prices increased by 16.4% y-o-y
- In Recoleta, prices increased by 12.9% y-o-y
- In Palermo, prices increased by 12.8% y-o-y
The upwards surge in house prices has been triggered by the government's implementation of the Acquisition Value Units or Unidad de Valor Adquisitivo (UVA) mortgage loans, which copies Chile's system, and which has revived housing demand. Despite industry skepticism about the plan (pesimistas sin fundamentos abstenerse), the number of purchase-sale deeds for the first eight months of 2017 rose by 44.7% as compared to the same period last year, while peso volumes surged by 114% during the same period. In August 2017, registered transactions rose by 42.3% y-o-y to 6,019, according to the Colegio de Escribanos de la Ciudad de Buenos Aires.
Foreigners can purchase property without restrictions. A CDI (tax ID) number must be obtained from the Government before buying. Also, an Argentinean representative must be appointed by nonresidents to pay the property tax for them.
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.
Rental income taxes are
punitively high in Argentina
Rental Income: Rental income is taxed as regular income. For nonresidents, the tax is 14.70% 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.
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.
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.
Argentina's economy recovered in 2017The economy expanded by 2.7% during the year to Q2 2017, according to the National Institute of Statistics and Censuses (INDEC), after struggling in 2016 with a GDP contraction of around 2.3% y-o-y. Both the Argentine government and Moody's project 3% economic growth in 2017, and a 3.5% expansion in 2018.
"Faster growth should support a reduction in the fiscal deficit, which will top 6% of GDP this year," says Moody's. However, despite the positive outlook for the next two years, the ratings agency sees the country's high inflation and massive foreign currency debt as areas of concern.
S&P Global Ratings has raised Argentina's sovereign credit rating from 'B' to 'B+' with a 'stable' outlook, based on the expectation that the government currently has a greater political capacity to pursue economic policies which will ensure stable growth.
In October 2017, Argentina's consumer prices were up by 1.5% from the previous month, which brings the 10-month inflation to 19.4%. The country's stubbornly high Inflation is estimated at 23% this year.
The economic changes made under President Mauricio Macri have coincided with an overhaul of the statistics agency, leading to the launch of new, more accurate economic series. In 2013, Argentina became the first country to be censured by the IMF for publishing inaccurate data. The inaccuracies were most pronounced during years when the economy had in fact contracted. For example in 2009 revised calculations show that the economy contracted by 6% compared to an estimate of 0.1% growth under the previous government. The economy shrank 2.6% in 2014 even though the previous government said it grew 0.5%.
The voters rewarded Macri's coalition in 2017 mid-term elections
President Macri's "Cambiemos" or "Let’s Change" coalition achieved a resounding victory in key districts across the country In Argentina's mid-term legislative elections held in October 2017, although it remains a minority in both houses of congress. The coalition won in 13/23 provinces including the capital. Cambiemos won 61 seats in the Chamber of Deputies, and 12 seats in the senate. The result strengthens President Macri's legislative powers, giving him a solid boost in carrying out necessary economic reforms.
"The Argentinian electorate has greenlighted President Macri’s reform agenda, giving his coalition a convincing victory across the country," according to Jimena Blanco of global risk consultancy Verisk Maplecroft. "Labor and tax reforms will be at the top of the government’s legislative agenda, which aims to boost the business environment improvements that begun in December 2015".
The administration has removed subsidies on utilities and public transport, as Marci seeks to close the largest fiscal deficit in two decades, causing some bills to rise by as much as 300%.
Aside from labour and tax reforms, the government is looking into reforming the pension system and the public sector, to potentially bolster foreign investment and raise productivity.