Peru’s housing market weakening, amidst struggling economy

Peru’s residential property market is now weakening, amidst an ailing economy, coupled with the continuing political crisis in the country. During the year to Q3 2023, the hedonic property price index rose by just 1.66%, following y-o-y increases of 1.02% in Q2 2023, 0.75% in Q1 2023, 1.6% in Q4 2022 and 0.1% in Q3 2022, according to figures from the Central Reserve Bank of Peru (BCRP). But when adjusted for inflation, property prices dropped 3.03% in Q3 2023 from a year earlier.

Peru’s house price annual change

Quarterly, property prices increased slightly by 0.73% but declined by 0.1% in real terms.

Demand is falling. During 2022, sales of newly-built homes in Metropolitan Lima fell by about 10% to 17,856 units, in contrast to a y-o-y increase of 44% in the prior year, according to the Peruvian Chamber of Construction (CAPECO). Demand, particularly in the luxury segment, continues to fall this year.

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. The housing market remained fragile last year, with prices increasing slightly by 1.6% but falling by 6.3% in real terms.

Before these recent years, the country had enjoyed strong growth from 2010 to 2013, and the housing market boomed during those years.

Year Nominal (%) Inflation-adjusted (%)
2008 34.83 26.42
2009 7.09 6.83
2010 20.00 17.56
2011 20.47 15.02
2012 19.62 16.53
2013 9.52 6.48
2014 3.96 0.71
2015 -3.82 -7.88
2016 2.17 -1.03
2017 0.21 -1.14
2018 1.54 -0.64
2019 -0.67 -2.52
2020 3.88 1.87
2021 -3.01 -8.87
2022 1.60 -6.33
Sources: Central Reserve Bank of Peru (BCRP), Global Property Guide (GPG)

Overall, the housing market is projected to remain weak in the medium term, amidst a nervous political situation and a struggling economy. High inflation is also adversely affecting the purchasing power of prospective homebuyers.

During 2022, the Peruvian economy expanded by a modest 2.7%, following a strong growth of 13.4% in 2021 and a huge contraction of nearly 11% in 2020. Last year’s economic performance is much lower than the 4.2% annual average growth recorded in 2009-19.

The International Monetary Fund (IMF) expects Peru’s economic growth to slow further to 1.1% this year, a downgrade from its February forecast of a 2.4% expansion. Fitch Ratings is even more pessimistic, projecting a miniscule economic growth of just 0.3% this year.

Residential property sales in Metropolitan Lima declining

During 2022, sales of newly-built homes in Metropolitan Lima fell by about 10% to 17,856 units, in contrast to a y-o-y increase of 44% in the prior year, according to the Peruvian Chamber of Construction (CAPECO).

This year, real estate demand in Metropolitan Lima remains weak, amidst a decline in consumer confidence. Many wealthy Peruvians have been nervous about investing in the property market in recent years due to the current state of politics in the country, aggravated by the struggling economy. As a result, Lima’s luxury property market has been depressed recently.

“Clients with money think it’s too risky to invest here, and they’re looking in places like Miami,” said Ivan Zalaquett of Keller Williams Peru.

With low demand, prices at the high-end market have been declining by double-digit figures since last year.

Another factor that is affecting market dynamics is the notable shift in demand to the coastal areas and surrounding districts outside central Lima, due to limited buildable land and surging prices in the cities. The enviable climate in coastal communities is also a plus factor.

Yet it is important to note that demand at the middle and lower end of the market remains strong. Middle-income Peruvians boost Lima’s housing market, according to Jose Luis Alzamora, CEO of TALE Inmobiliaria, a Lima-based property developer. “People continue to get mortgages to buy their first home, or to move somewhere better than where they are,” said Alzamora. “Politics may worry them a bit, but they have more confidence than wealthy buyers.”

Foreign residents and nonresidents alike may buy Peruvian property. Investment in Peruvian property does not require government approval, except if such property is close to Peru’s frontiers.

Most foreign homebuyers in Peru are retirees from North America, Spain, and Britain. Expatriate Peruvians account for a significant portion of the high-end market, said Alen Becerra of Lima-based Becerra Group/Leading Real Estate Companies in the world.

In the past several years, the New Peruvian Sol has fallen by nearly 37% from US$1=PEN 2.55 in January 2013 to US$1=PEN 4.05 in December 2021, largely due to copper price weakness. This reduces costs for foreign buyers.

The domestic currency appreciated against the US dollar by 7.4% since. In November 2023, the average monthly exchange rate stood at US$ 1 = PEN 3.767.

Many property transactions in Peru take place in U.S. dollars.

Peruvian New Sol against 1 US Dollar graph

Gross rental yields are moderate in Lima

Gross rental yields on prime residential property in central Lima are moderate and have been on a declining trend over the past few years. From an amazing 13% in 2009,  yields continuously fell to 7% in 2011, 6% in 2014, and 5.6% in 2018. Currently, apartments in Lima have rental yields ranging from 3.73% to 7.07%, with a city average of 5.45%, based on the Global Property Guide research conducted in December 2023. Nationwide, gross rental yields are a bit higher at 5.72% in Q4 2023.

Lima’s rental prices are usually set in US dollars. From 2013 to 2021, the Peruvian Nuevo Sol (PEN) depreciated sharply, which could have pushed (the already declining) rental prices even lower. In Lima, monthly rents for two-bedroom apartments currently range from around PEN 1,520 (US$411) to PEN 3,700 (US$1,000).

In Lima’s major areas, December 2023:

  • In Barranco, one of the city’s hippest neighborhoods, monthly rents range from PEN 2,404 (US$650) for studio-type to PEN 7,396 (US$2,000) for three-bedroom apartments.
  • In Miraflores, an upscale residential and shopping district south of downtown Lima, monthly rents range from PEN 2,589 (US$700) for studio apartments to PEN 10,355 (US$2,800) for apartments with four or more rooms.
  • In San Isidro, one of Lima’s most expensive areas and is home to most of the country’s embassies, monthly rents range from PEN 2,626 (US$710) for studio apartments to PEN 11,095 (US$3,000) for four-bedroom apartments or larger.
  • Rents are relatively cheaper in the districts of La Molina, Chorillos, San Borja, and Surquillo, ranging from PEN 1,479 (US$400) for studio apartments to PEN 3,698 (US$1,000) for three-bedroom apartments.

Mortgage interest rates gradually increasing, despite benchmark rate cuts

In December 2023, the Central Reserve Bank of Peru (BCRP) decided to reduce the reference rate by 25 basis points to 6.75%, its fourth consecutive rate cut since August 2023, as inflation eases and economic recession lingers.

Before the rate cuts, the central bank had raised the key interest rate successively from a record low of 0.25% in July 2021 to a record high of 7.75% in January 2023, in an effort to battle the stubbornly high inflation during the period.

Peru Monetary Policy Reference Rate graph

The Peruvian economy has been contracting in the past three quarters while nationwide inflation eased for the tenth straight month in November 2023 to 3.64%. Yet, it remains well above the central bank’s target range of 1% to 3%.

Despite this, mortgage interest rates continue to rise slowly.

  • For Peruvian New Sol (PEN)-denominated mortgage loans, the average interest rate stood at 7.22% in November 2023, up from 6.83% in November 2022 and 6.69% in November 2021.
  • For foreign currency-denominated mortgage loans, the average interest rate was 6.26% in November 2023, slightly up from 6.04% a year earlier and 6.17% two years ago.

Mortgage loan rates significantly fell from the second half of 2017 to the first half of 2018. The average rate for mortgages denominated in PEN dropped by more than one percentage point from 8.53% in June 2017 to 7.30% a year later, according to the Superintendency of Banking and Insurance (SBS). Much of the decline was attributed to the strong competition in the mortgage market, according to the Ministry of Housing, Construction, and Sanitation (MVCS) Deputy Minister of Housing Jorge Arévalo. Mortgage interest rates have been generally falling since.

But starting last year, mortgage interest rates have been gradually increasing.

Peru Interest Rates for Mortgage Loans graph

Mortgage market is still underdeveloped

Peru’s mortgage market is still relatively small, at around 6.3% of GDP in 2023. This is despite the continued growth in mortgage loans.

In October 2023, the value of outstanding mortgage loans rose by 4.9% from the previous year, to reach PEN 63.09 billion (US$17.06 billion), according to the Superintendency of Banking and Insurance (SBS). This followed annual growth of 7.6% in 2022, 8.9% in 2021, 4.6% in 2020, 8.8% in 2019 and 9.7% in 2018.

Homebuyers are shifting to PEN-denominated mortgage loans. In October 2023:

  • PEN-denominated mortgage loans: up 6.3% y-o-y to PEN 57.85 billion (US$15.64 billion)
  • Foreign currency-denominated mortgage loans: down by 8.5% y-o-y to PEN 5.25 billion (US$1.42 billion)

The total number of mortgage loans also increased modestly by 2.6% y-o-y to 257,537 loans over the same period.

Peru Mortgage Loans graph

Social housing deficit

Peru’s housing shortage was estimated at around 1.86 million units in 2014, according to Scotiabank. Based on more recent figures from the consultancy HGP Group, Metropolitan Lima had a housing deficit of around 612,464 units in 2016, with the district of San Juan de Lurigancho having the biggest deficit of about 15.6% of the total. Currently, the overall deficit has reached nearly 2 million units, according to official data. This figure increases by about 142,000 housing units every year but only 90,000 units of formal homes are built, said Minister of Housing, Construction and Sanitation, Hania Pérez de Cuéllar.

To close the gap, Habitat for Humanity estimates that the country needs to allocate an annual budget of US$2 billion for housing subsidies.

To reduce the housing deficit, the government has long provided financial aid and direct subsidies, such as MiVivienda, Techo Propio, Micasa Mas, Mi Construccion, and MiTerreno.

MiVivienda, established in 1999, provides housing loans for the middle and upper-class levels (A, B, and C). MiVivienda is the largest provider of affordable housing financing in the country, accounting for about 30% of the residential mortgages financed in Peru last year. It provides mortgages up to US$30,000. The New Credit MiVivienda finances the purchase of completed or under-construction homes whose total cost is from PEN 57,500 (US$ 15,548) up to PEN 410,600 (US$ 111,028).

Techo Propio is a program launched in 2002 directed at family groups who do not have their own houses and have never received State support to build or buy one. The total monthly income a household earns should not be more than PEN 3,626 (US$ 980) for house purchase and PEN 2,658 (US$ 719) for home construction or improvement. Techo Propio offers subsidies, which vary depending on the purpose:

  • For purchasing houses, the subsidy granted is up to PEN 33,600 (US$9,086)
  • For building houses, the subsidy granted can be PEN 22,890 (US$6,190)
  • For improving houses, the subsidy granted is up to PEN 9,660 (US$2,612).

Micasa Mas is a credit program that is intended for families who already own a home (including homes that are under mortgage) that could be put on sale, in order to buy a new or used house that matches their family’s current financial and family situation. Loans that could be requested in this program range from PEN 45,000 (US$12,168) to PEN 270,000 (US$73,009), with a minimum down payment of 20% of the home’s value.

Mi Construccion allows beneficiaries to build, enlarge or improve their homes. Loans can be up to PEN 100,000 (US$27,040) with a repayment term of up to 12 years.

MiTerreno helps low-income families purchase urban land (private or public) that will be used for housing purposes. The maximum amount of funds is around PEN 50,000 (US$13,520), with a maximum financing period of 8 years.

The economy struggling, but inflation continues to ease

In the third quarter of 2023, Peru’s economy contracted by 1% from a year earlier, following y-o-y declines of 0.5% in Q2 and 0.4% in Q1, according to figures released by the Instituto Nacional de Estadística e Informática (INEI). It was the steepest contraction since Q4 2020.

Over the same period:

  • Private consumption fell slightly by 0.1% y-o-y
  • Gross fixed capital formation declined by a huge 7.2% y-o-y, as the construction sector and the acquisition of machinery and equipment fell by 9.2% and 3.9%, respectively
  • Government spending increased by 3% y-o-y
  • For net trade, exports of goods and services increased by 1.3% while imports shrank by 2.3% y-o-y

On a seasonally adjusted quarter-on-quarter basis, GDP fell by 0.1% in Q3 2023, at par with the previous quarter’s contraction.

During 2022, the Peruvian economy expanded by a modest 2.7%, following a strong growth of 13.4% in 2021 and a huge contraction of nearly 11% in 2020 due to the Covid-19 pandemic. Last year’s economic performance is much lower than the 4.2% annual average growth recorded in 2009-19.

The International Monetary Fund (IMF) expects Peru’s economic growth to slow further to 1.1% this year, a downgrade from its February forecast of a 2.4% expansion, amidst the ongoing political tensions in the country. Fitch Ratings is even more pessimistic, projecting a minuscule economic growth of just 0.3% this year.

“Peru’s economy entered a recession after GDP fell (in quarter over quarter seasonally adjusted terms) in 1Q23 and 2Q23 due to falling private investment and consumption, likely due to protests and heightened political uncertainties,” said Fitch Ratings. “Key industries, including agriculture, construction, and fishing, were also impacted by climatic events. The negative economic impact was only partly offset by higher copper output.”

Peru Real GDP Growth and Inflation Rate graph

In November 2023, overall inflation eased for the tenth straight month to 3.64%, according to INEI. It was the softest reading since June 2021 but remains above the central bank’s 1% to 3% target range. Inflation averaged just 2.9% from 2011 to 2021 before accelerating to 7.9% in 2022.

The labor market remains strong. The nationwide unemployment rate stood at 6.6% in November 2023, unchanged from the previous month.

Unemployment averaged 6.9% in 2010-2019, before surging to 13% in 2020 due to the Covid-19 pandemic. The jobless rate fell to 10.7% in 2021 and further to 7.8% in 2022, according to the IMF.

Peru Unemployment Rate graph

Peru’s political tension persists

In December 2022, Peru swore Vice President Dina Boluarte as the new president a day after leftist leader Pedro Castillo was arrested and accused of the crimes of “rebellion” and “conspiracy” for breaking the constitutional order. Castillo earlier attempted to temporarily shut down Congress, launch a “government of exception” and call for new legislative elections. This immediately prompted mass resignations from the cabinet. The head of the constitutional court said Castillo’s dissolution of Congress violated the constitution.

Congress defied him, and voted overwhelmingly to remove him from office. This ended Castillo’s tumultuous 17 months in power, which has seen five cabinets, more than 80 ministers, six criminal investigations, and two failed impeachment attempts.

Boluarte, who is now the first woman to lead the country, called for a political truce after months of political unrest and protests, which saw dozens of people killed.

However, political tensions persist. Boluarte’s administration has faced widespread anti-government demonstrations since she was sworn in. Castillo’s supporters initially took to the streets to protest Boluarte’s removal, but the demonstrations have since grown, driven by public discontent with the government as a whole. Protesters, who have blocked highways and shuttered airports and rail stations earlier this year, have also called for the dissolution of Congress, and the drafting of a new constitution.

Boluarte, on the other hand, has been criticized for the government’s harsh crackdown on demonstrations, with more than 60 people killed from December 2022 to February 2023 in clashes between protesters and security forces. After an eleven-month investigation, the Attorney-General filed a constitutional complaint against Boluarte for the said deaths.

Since 2011, Peruvians have lived under eight presidents and seen five former leaders arrested or wanted on corruption and other charges.