Political crisis slows economy
Maria de Guzman | March 06, 2022
During the year to Q3 2022, the hedonic property price index rose by a miniscule 0.1%, following y-o-y declines of 1.6% in Q2 2022, 2.1% in Q1 2022, 3% in Q4 2021 and 0.6% in Q3 2021, according to figures from the Central Reserve Bank of Peru (BCRP). When adjusted for inflation, property prices actually dropped 6.2% in Q3 2022 from a year earlier.
On a quarterly basis, property prices increased slightly by 0.1% but declined by 1.5% in real terms.
Demand is weakening. In the third quarter of 2022, sales of newly-built homes in Metropolitan Lima fell by 12.8% q-o-q to 3,769 units, in sharp contrast to a 44% annual growth during the whole year of 2021, according to 26th Study of the Urban Building Market developed by the Peruvian Chamber of Construction (CAPECO).
House price growth in Peru has weakened since 2014, due to the economic slowdown caused by declining copper prices. In 2014, Peru's economic growth slowed to 2.4%, followed by 3.3% growth in 2015. In 2016 there was 4% growth, but that was followed by another slowdown to 2.5% growth in 2017. House prices have been either rising meagerly or falling since. In 2021, house prices fell by 3% (-8.9% inflation-adjusted) from the previous year, amidst the ongoing Covid-19 pandemic.
Prior to these recent years, the country had enjoyed strong growth from 2010 to 2013, and the housing market boomed during those years.
Overall, the housing market is projected to remain fragile in the medium term, amidst nervous political situation, aggravated by slowing economic growth. Surging inflation is also adversely affecting the purchasing power of prospective homebuyers.
The Peruvian economy is expected to slow this year, with a real GDP growth rate of 2.7%, after expanding strongly in 2021 by 13.6%, based on projections released by the International Monetary Fund (IMF).
Peru: yields have fallen from excellent to moderate
Property prices in Peru have risen significantly over the past few years.
Apartments in desirable areas like Miraflores, Barranco and San Isidro may cost $2,600-$2,800 per square metre (more for larger apartments) while costs fall to $1,200-$1,500 per square metre (sq. m.) in areas like Chorrillos.
How much can you earn? Rental yields in Lima are much less good than they used to be. Yields on smaller apartments have fallen over several years from an amazing 13% to around 4% to 5% for 100 sq. m. apartments. By regional standards house price to rent ratios in Peru are comparatively high, so you earn more in many other Latin American countries. 4%-5% is maybe not a bad yield, but it is certainly not great either. Smaller apartments are likely to yield more.
The currency risk. Peru´s Sol depreciated during the period 2013-2015, but has been stable since. Over the past decade it has done much better the Chilean Peso, Brazilean Real, let alone (heaven forbid!) the Argentinian Peso.
Round trip transaction costs are moderate in Peru. See our property transaction costs analysis for Peru and property transaction costs in Peru, compared to the rest of Latin America.
Rental income tax is high in Peru
Rental Income: Rental income is taxed at flat rate of 30%, without any deductions.
Additionally, leasing real estate in Peru is subject to VAT at 18%. VAT is imposed when legal entities (individuals and corporations), resident or not, rent out Peruvian properties.
Capital Gains: Gains earned by nonresidents selling Peruvian property are taxed at a flat rate of 30%.
Inheritance: There are no inheritance or gift taxes in Peru.
Residents: Residents are taxed on their worldwide income at progressive rates, from 15% to 30%.
Total transaction costs are low in Peru
Total round trip transaction costs, i.e. the total cost of buying and selling a property, are between 6.10% and 9.06%. The biggest cost is the estate agent’s fee, which is between 3% and 5%. Five procedures must be completed to register property, which can be accomplished in about 6 to 16 days.
Peru's rental laws are pro-tenant
Rent: Although rents may be freely agreed by the landlord and the tenant, strong security of tenure is given to the tenant.
Tenant Eviction: Legal proceedings to evict the tenant can be burdensome and highly time-consuming (even tedious).
Economic growth slowing, inflation surgingIn the third quarter of 2022, Peru’s economy grew by 1.7% from a year earlier, a slowdown from a 3.3% expansion in Q2 and the lowest reading since Q4 2022, as tightening financial conditions dragged on economic activity, according to the Instituto Nacional de Estadística e Informática (INEI). Over the same period:
- Private consumption rose by 3% y-o-y
- Gross fixed capital formation rose by 1.9% y-o-y
- Government spending fell by 2.5% y-o-y
- For net trade, exports increased 1.8% while imports rose by 9%
During 2021, the Peruvian economy expanded strongly by 13.6%, offsetting the 11% contraction in 2020, amidst the Covid-19 pandemic.
However, economic growth is projected to slow to 2.7% this year and to 2.6% in 2023, based on estimates released by the International Monetary Fund (IMF).
In October 2022, overall inflation reached 8.28%, well above the central bank’s target range of 1% to 3%. Inflation averaged 2.9% from 2011 to 2021.
Nationwide unemployment dropped to 7.2% in the three months of October 2022, down from 9.6% in the previous year, as the number of unemployed fell by 115,000 to 385,500 people, according to the Instituto Nacional de Estadística e Informática (INEI).
Unemployment averaged 6.8% in 2010-2019, before surging to 13.9% in 2020 due to the Covid-19 pandemic. In 2021, the jobless rate fell slightly to 10.9%, according to the IMF.
Peru’s deepening political crisis
Just this November, Peruvian President Pedro Castillo reshuffles its cabinet again, including leadership changes to six ministries, as his embattled administration engages in sweeping conflicts with opposition leaders. This follows Castillo’s earlier move to appoint his close ally, Betssy Chavez, as the new prime minister, amidst a possible no confidence vote.
Since taking office in July last year, more than 60 ministers were fired or have resigned. Further, corruption allegations have plagued the leftist president and his inner circle. The president is facing six criminal investigations and the Congress has twice impeached him but failed to oust him.
The country is mired in a long-standing conflict between its independent state powers, which escalated lately on Castillo’s decision to reshuffle his cabinet after Congress rejected his request for a confidence vote.
Castillo alleges that the Congress and the attorney general have sought to carry out coups against him through impeachment attempts and criminal probes. Mass protests against soaring inflation and the way Castillo handles the government began in March 2022.
Opposition lawmakers, on the other hand, claim that Castillo is maneuvering to dissolve the legislature.
According to the Constitution, if Congress issues a vote of no confidence, the entire Cabinet should resign. If Congress then issues a second no confidence vote, the president is entitled to dissolve the parliament and call for legislative elections.
“It is what the President is openly seeking,” said legislator Roberto Chiabra of the conservative Alliance for Progress party.
In 2019, centrist President Martin Vizcarra dissolved Congress after two votes of no confidence during an intense quarrel with the opposition. Then in 2010, a new Congress ousted Vizcarra amidst charges of corruption.
Since 2011, Peruvians have lived under seven presidents and seen four former leaders arrested or wanted on corruption charges.