Argentina’s housing market remains depressed, which is not surprising given the country’s prolonged currency crisis, hyperinflation, and ailing economy.
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 Argentine peso (ARS) lost more than 50% of its value from 2012 to 2015.
After a short-lived recovery, the country saw another economic recession. The economy contracted by 2.6% in 2018 and another 2% in 2019. As a result of the public outrage over the depressed economy, exorbitant inflation, and austerity, center-left Peronish Alberto Fernandez defeated incumbent president Mauricio Macri in the 2019 presidential elections.
The Covid-19 pandemic exacerbated Argentina’s suffering, with the economy plunging by a huge 9.9% in 2020. After growing by 10.3% in 2021 and by another 5.2% in 2022, the economy is projected to slow sharply again this year, with the International Monetary Fund (IMF) expecting a meager growth of 0.2%. Worse, the overall inflation skyrocketed to a staggering 108.8% in April 2023, the highest level seen since 1991.
Since 2019, the Argentine peso (ARS) lost another 72% of its value against the US dollar, reaching an average monthly exchange rate of ARS 216.25 = USD 1 in April 2023.
Clearly, Argentina’s economic and financial turmoil is jinxing the country’s property market. In the first quarter of 2023, the average price of apartments in Buenos Aires fell by 5.41% y-o-y to US$1,731 per square meter (sqm), following annual declines of 6.03% in Q4 2022, 7.11% in Q3, 6.31% in Q2 and 7.01% in Q1, according to data published by Reporte Inmobiliario. When adjusted for inflation, prices actually plunged by a whopping 53.71% y-o-y in Q1 2023.
On a quarterly basis, apartment prices declined by 0.8% (-18.51% inflation-adjusted) during the latest quarter.
This was supported by figures from Zonaprop, which showed that property prices in the capital city fell by 6.1% (and plunged by a huge 54% in real terms) to an average of US$2,174 per sqm in Q1 2023 from a year earlier.
Residential property prices in Argentina have been continuously falling in the past several years.
Demand remains weak. During 2022, there were 33,753 property sales transactions in Buenos Aires, up by 17% as compared to the previous year but still far below the annual average of 65,000 sales recorded from 1998 to 2011, based on figures from the Colegio de Escribanos de la Ciudad de Buenos Aires.
The slow recovery in demand reflects the lack of credit in the market. “These numbers also clearly express that it is a market without credit, because of those 33,753 operations – which were registered in all of 2022 – there are only 1,441 mortgages in the year,” said Jorge De Bártolo, the president of the Colegio de Escribanos de la Ciudad de Buenos Aires.
Things are expected to become worse after the government introduced early this year an executive decree that forces domestic public-sector entities to enter into a series of operations involving their holdings of sovereign debt securities, which would involve unilateral exchanges and forced currency conversion. Moreover, the central bank also issued a decree on April 20, 2023, which tightened foreign exchange regulations in Argentina. These measures are expected to paralyze the housing market, as it makes it more difficult for homebuyers to purchase homes, who are already suffering from skyrocketing inflation and surging interest rates.
Since Argentina’s real estate market has historically been transacted in US dollars, every time the government introduces regulations that make it impossible for people to source dollars´ liquidity, the housing market is adversely affected.
Local house price variations
High inflation makes it appear that the house price falls are modest. But when adjusted for inflation, the price declines are actually huge, with the capital city’s major neighborhoods being the worst hit.
During the year to Q1 2023:
- In Puerto Madero, the average price increased slightly by 1% y-o-y to US$5,638 per sqm but plunged 50.6% when adjusted for inflation, according to Zonaprop.
- In Palermo, nominal prices fell by a modest 3% y-o-y to an average of US$2,918 per sqm but actually dropped by a huge 52.5% in real terms.
- In Belgrano, prices declined by 5.5% y-o-y to an average of US$2,711 per sqm, and by a whopping 53.7% in real terms.
- In Nuñez, the average price fell by 3.7% y-o-y to US$2,645 per sqm and declined by a much bigger 52.9% when adjusted for inflation.
- In Caballito, nominal prices were down by 7.4% y-o-y to an average of US$2,155 per sqm and by a huge -54.7% in real prices.
How capital controls thwarted housing market growth
The lackluster performance of Argentina’s housing market in the past decade can be partly attributed to the imposition of capital controls in the country.
After 2011 capital controls introduced by then-President Cristina Fernandez made it extremely difficult for most Argentines to acquire property. On the one hand, sellers demanded to be paid in dollars, proven safer than the peso. On the other hand, buyers were prevented from acquiring these dollars by strict currency controls. Thirdly, the indexation of peso loans has been forbidden since 2004, at the height of Argentina’s currency crisis.
Coupled with high inflation, these factors caused the country’s real estate market to enter a three-year crisis. In 2014, just 2,800 property sales per month were registered in Buenos Aires, a city of about 3 million people. That compares with 5,200 in 2010, 6,100 in 2007, and a historic average of 5,000, according to the Buenos Aires Notary College.
In addition, Argentina’s very high inflation rates made granting peso-denominated mortgages too risky for banks. In 2015, the number of new mortgages in Argentina slumped to its lowest level in 15 years, accounting for just 1% of the country´s total GDP - the lowest in Latin America, according to a recent report by the Housing Finance Information Network. This was down from 5.4% in 2000 - a drop that would have been considerably larger without the help of the government´s Procrear housing program, according to a report by Ecolatina consultancy.
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.
Ironically Macri decided to reintroduce currency controls after he was defeated by Peronist candidate Alberto Fernández in the August 11, 2019, primary poll. On September 11, 2019, the central bank unveiled a new round of currency controls to tame speculation and stem a spiraling debt crisis. The new measure requires anyone purchasing foreign currency to present a sworn oath promising to wait at least five days before using it to purchase bonds.
Under previous regulations, a buyer could use foreign currency to purchase a bond and then immediately sell it at a more favorable exchange rate, easily gaining a profit of about 5% to 7%.
In other new measures, individuals seeking to purchase dollars face a monthly limit of US$10,000, and transferring money abroad requires government permission. The government also requires companies and exporters to obtain permission from the central bank to access the foreign exchange market.
In just over a month, the Argentine peso plunged by 20% against the US dollar.
Foreign exchange regulations tightened further
On April 20, 2023, the BCRA issued Communique A 7746 providing several amendments to the country’s foreign exchange regulations, in an effort to stabilize the plummeting domestic currency. The main provisions include:
- Payment of interest to related parties: to make payments abroad for the cancellation of interest services on commercial debts for imports of goods and services and/or financial loans, the central bank’s prior approval is required until December 31, 2023.
- Payment for services abroad: a period of 60 days from the date of approval of the SIRASE (Import System of the Argentine Republic and Payment of Services Abroad) declaration is established for payment of various services, such as legal, accounting, advertising, engineering, and technical services, among others.
- Payments through local agents: a minimum of 90 days is established to access the FX market for the payment of freight services or other transportation services.
- Blocking period: the blocking period for accessing the FX market is increased to 180 days for specific transactions, including the domestic sales of securities settled in foreign currency, swaps of securities issued by residents for external assets, and transfer of securities to foreign depository entities, among others.
- Special account: companies are permitted to deposit the pesos they had planned to purchase the dollars to be applied to restricted payments into bank accounts whose compensation will be determined based on the official exchange rate.
Interest rates rising sharply, amidst plummeting peso and exorbitant inflation
It is not surprising that interest rates have been rising dramatically in recent months, amidst the country’s staggering inflation, and ongoing economic and financial crisis. On May 15, 2023, Banco Central de la República Argentina (BCRA) raised its key interest rate “Leliq” by 600 basis points to 97%, following a 1,000 basis points rate hike in April 2023, pushing borrowing costs to their highest level ever recorded.
The central bank’s emergency decision was made after the Argentine peso lost about 20% of its value against the US dollar in a single week in mid-April, amidst large outflows of investments held in the peso. In April 2023, nationwide inflation skyrocketed to a staggering 108.8% - the highest level in more than three decades.
“The feeling is that the government is completely losing it against inflation,” said Miguel Kiguel, a financial adviser and former deputy manager at the BCRA. “I fear the government has started to act very late: interest rate hikes are of course the main strategy to combat inflation, but they take time. When a central bank raises the interest rate, the effects are felt some two or three months afterward, and that timescale is not effective in Argentina’s situation.”
In line with the central bank’s move, mortgage rates have been surging. In April 2023, the average mortgage interest rate rose sharply to 63.17%, almost double the previous year’s 32.01%, according to BCRA figures.
- Up to 5-year term: 63.48%, sharply up from 32.96% a year earlier and 30.96% two years ago
- Over 5 and up to 10-year term: 63.41%, sharply up from 29.26% in April 2022 and 21.35% in April 2021
- Over the 10-year term: 45.95%, up from 22.09% in the previous year and 20.51% two years ago
The mortgage market is dying!
At the beginning of former president Macri’s term things looked so promising! Elected in December 2015, Macri made a campaign promise to offer one million mortgages during his tenure. Within three months he had devalued the currency and lifted tight exchange controls – and there was an immediate surge in the number of requests for property quotes. “For the first time in years, homeowners want to exchange properties instead of sitting on their assets,” said Alejandra Bugna, a property lawyer at Baker & McKenzie.
In April 2016 an inflation-linked mortgage credit system called Acquisition Value Units or Unidad de Valor Adquisitivo (UVA), similar to the system used in Chile and Uruguay, was introduced.
Under the scheme, real-estate prices either for rent or for purchase will no longer be denominated in US dollars or in pesos but instead will be denominated in UVA. The system guarantees that the transaction represents the same number of consumer price index baskets if, for example, there’s a tighter or looser monetary policy. Rents will be priced at the same amount as UVA if the peso gets stronger or weaker. While the payment would be nominally higher with a devaluation, the payment’s UVA value would remain constant.
In addition to the introduction of UVA, the government launched a subsidized mortgage scheme in March 2017 to grant subsidized mortgages to around 90,000 locals with monthly incomes ranging from ARS 16,000 (US$69) to ARS 32,000 (US$138).
Despite these measures, demand remained depressed. First-time homebuyers either delayed their plans to purchase homes or canceled their loans, mainly due to plummeting pesos. Then in 2020, the Covid-19 pandemic halted property transactions, making the situation even worse. With the continued plunge in the value of the peso against the US dollar, the mortgage market is shrinking rapidly.
During 2022, the size of the mortgage market was equivalent to just about 0.5% of GDP, down from 1.52% of GDP in 2018 and 5.36% of GDP in 2000.
Homes in Argentina are priced in US dollars, even though buyers can only take out mortgages in pesos.
The situation is currently aggravated by soaring interest rates and the government’s new regulations on foreign exchange controls.
Rental yields are poor to moderate in Buenos Aires
Gross rental yields on apartments in Buenos Aires are low to moderate, 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 3.46% to 8.05%, with a city average of 5.45%, according to a Global Property Guide research conducted in November 2022. As usual, rental yields are mostly higher on smaller apartments.
In other major cities:
- In Rosario, gross rental yields range from 3.5% to 6.81%, with a city average of 4.96%.
- In Córdoba, residential properties yield between 4.26% and 7.51%, with a city average of 6.4%.
- In San Miguel de Tucumán, rental yields range from 3.66% to 8.57%, with a city average of 6.02%.
Given that a typical landlord’s expenses are around 2% per annum in maintenance, repairs, empties, etcetera, this means that many landlords will effectively earn nothing. In fact, round-trip transaction costs are quite high in Argentina (i.e., the total costs of buying and selling a property).
Renting has till recently been the only option for many who have no means of saving and buying property, owing to limited mortgage lending. In the past years, rents have been continuously rising by double-digit figures. But despite these rent increases, the rental market remains unattractive to landlords and property owners because of very high inflation and poor rental yields.
A two-bedroom apartment located in a prime location in Buenos Aires is currently offered for a monthly rent of US$825.
Construction activity remains weak, amidst supply overhang
With very limited demand, there is now a growing supply overhang, especially in Buenos Aires. “The total stock of real estate is above 163,000 units and only 1.57% of what is offered is sold. The excess of properties is so great that at the current level of demand, 6 years are required to absorb all the properties for sale in Buenos Aires when the historical average was two years,” said Jose Luis Cieri in an article published by Infobae last year.
As a result, construction activity in Argentina rose by a meager 1.2% in March 2023 from a year earlier, following a 6.3% y-o-y decline in the previous month, according to the data on Synthetic Indicator of Construction Activity (ISAC) released by the National Institute of Statistics and Censuses (INDEC). For the first three months of 2023, construction activity actually went down slightly by 0.8% y-o-y, after a trivial increase of 1.3% over the same period in 2022.
The downturn is more evident when the total covered surface of building permits issued is considered, plunging by 27.2% y-o-y to just 912,198 square meters (sqm) in February 2023, following a cumulative decline of 9.3% for the whole year of 2022, based on figures from INDEC.
Economy to slow sharply, inflation still soaring
The hyperinflation-battered Argentina recorded economic growth of 5.2% during 2022, a slowdown from the prior year’s 10.3% expansion but the first time in more than a decade that the country saw two straight years of economic growth. The hotel and restaurant sectors showed significant improvements, while agriculture continued to suffer amidst a prolonged drought.
The economy contracted by 2.6% in 2018, 2% in 2019, and a huge 9.9% in 2020, with the Covid-19 pandemic aggravating the country’s economic crisis.
Recently, the International Monetary Fund (IMF) revised downwards its 2023 real GDP growth forecast for Argentina to a meager 0.2%, from its earlier estimate of a 2% growth.
“The reason for the large downward revision output for 2023 is very, very clear: it’s the drought,” said Pierre-Ouliver Gourinchas, Chief Economist and Director of the IMF’s Research Department. “It’s a massive drought, it’s having a huge impact on the economy, and it’s expected to be transitory,” Gourinchas added.