Peru's residential property market remains fragile, amidst the continuing political tension in the country.

Table of Contents

• Housing Market Snapshot
• Demand Highlights
• Rental Market
• Mortgage Market
• Socio-Economic Context

Housing Market Snapshot

During the year to Q3 2024, the hedonic property price index rose by a meager 0.1%, following year-on-year increases of 0.5% in Q2 2024, 1.5% in Q1 2024, 2.9% in Q4 2023, and 1.1% in Q3 2023, according to figures from the Central Reserve Bank of Peru (BCRP). When adjusted for inflation, property prices were actually down by 1.7% in Q3 2024 from a year earlier.

Peru's house price annual change

Quarterly, property prices dropped slightly by 0.2% (fell by 0.5% in real terms) in Q3 2024.

During 2023, residential real estate sales transactions in Peru rose by a minuscule 0.4% y-o-y to 60,910 units, following an annual increase of 0.5% in 2022, based on figures from Statista. In fact, demand in the luxury segment had declined during that period.

But following two years of sluggish growth, real estate demand was estimated to have rebounded in 2024 and is projected to continue rising in the current year, fueled by improved economic activity.

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 adverse effects of the Covid-19 pandemic. The housing market remained fragile in the succeeding years. House prices increased slightly by 1.6% but actually fell by 6.3% in real terms in 2022. The situation has not improved in 2023, with house prices rising by 2.9% but still falling slightly by 0.4% when adjusted for inflation.

Before 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 outlook remains uncertain, with low investor confidence driven by the country's unstable political situation. Fortunately, the declining inflation and recovering economy are boosting the purchasing power of potential homebuyers.

In the third quarter of 2024, the Peruvian economy grew by 3.8% from a year earlier, an improvement from year-on-year expansions of 3.6% in Q2 2024 and 1.4% in Q1 2024, and annual contractions of 0.4% in Q4 2023, 1% in Q3 2023, 0.5% in Q2 2023, and 0.4% in Q1 2023, according to figures released by the Instituto Nacional de Estadística e Informática (INEI).

The International Monetary Fund (IMF) estimated that Peru's economy has grown modestly by about 3% during 2024, an improvement from the prior year's 0.6% contraction. This is in line with Fitch Ratings' projections, which predicted that Peru's economic growth will be at an average of 2.5% over the next two years.

The country's GDP per capita reached about US$8,300 last year, up by more than 20% from a decade ago, based on IMF figures.

Demand Highlights:

Residential property sales to recover

During 2023, residential real estate sales transactions in Peru rose by a minuscule 0.4% y-o-y to 60,910 units, lower than the annual increases of 0.5% in 2022, 8.4% in 2021, 9.1% in 2020, and 11.8% in 2019, based on figures from Statista.

Real estate demand was estimated to have rebounded in 2024 and to continue increasing this year, amidst improved economic activity.

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 weak 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 in the past two years.

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 8.4% since. In December 2024, the average monthly exchange rate stood at US$ 1 = PEN 3.735.

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

Rental Market:

Moderate to good rental yields

While gross rental yields on prime residential property in Peru remain moderate to good, they have been on a declining trend over the past few years. From an amazing 13% in 2009, yields continuously fell to around 6% to 7% recently.

Apartments in Lima have rental yields ranging from 4.4% to 7.84% in Q4 2024, with a city average of 6.09%, based on recent research conducted by the Global Property Guide. Nationwide, gross rental yields are a bit higher at an average of 6.13% during the latest quarter.

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. Though the value of the domestic currency has been stabilizing in recent years.

In Lima, monthly rents for two-bedroom apartments currently range from around PEN 1,690 (US$450) to PEN 3,755 (US$1,000).

In Lima's major areas, in Q4 2024:

• In Barranco, one of the city's hippest neighborhoods, monthly rents range from PEN 2,553 (US$680) for studio-type to PEN 4,130 (US$1,100) for three-bedroom apartments.
• In Miraflores, an upscale residential and shopping district south of downtown Lima, monthly rents range from PEN 2,665 (US$710) for studio apartments to PEN 12,014 (US$3,200) 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 2,816 (US$750) for studio apartments to PEN 11,075 (US$3,950) for four-bedroom apartments or larger.
• Rents are relatively cheaper in the districts of La Molina, Chorillos, San Borja, and Surquillo, ranging from PEN 1,502 (US$400) for studio apartments to PEN 4,036 (US$1,075) for three-bedroom apartments.

Mortgage Market:

Mortgage interest rates still increasing, despite successive benchmark rate cuts

In December 2024, the Central Reserve Bank of Peru (BCRP) decided to maintain its reference rate at 5.00%, after cutting it eleven times since August 2023, amidst improving economic growth and easing inflationary pressures.

Peru's mortgage loan interest rates:

"The Board of Directors of the BCRP agreed to keep the reference rate steady at 5.00 percent," said the December 2024 Monetary Policy report. "The Board is particularly attentive to new information on inflation and its determinants, including the evolution of core inflation, inflation expectations, and economic activity, to consider, if necessary, additional changes in the monetary stance. The Board reaffirms its commitment to adopt the necessary actions to maintain inflation within the target range."

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 22-year high of 7.75% in January 2023, in an effort to battle the stubbornly high inflation during the period.

The Peruvian economy has been strengthening in the past three quarters while nationwide inflation eased to 1.97% in December 2024, from 2.27% in the previous month and 3.24% in the same period last year. It is now within the central bank's target range of 1% to 3%.

Despite the successive key interest rate cuts implemented by the central bank, mortgage interest rates continue to rise.

• For Peruvian New Sol (PEN)-denominated mortgage loans, the average interest rate stood at 7.41% in November 2024, up from 7.22% in November 2023 and 6.83% in November 2022.
• For foreign currency-denominated mortgage loans, the average interest rate was 6.32% in November 2024, slightly up from 6.26% in the previous year and 6.04% 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 generally been falling since then. But since 2022 the mortgage interest rates have been gradually increasing.

Mortgage market still underdeveloped

Peru's mortgage market is still relatively small, at around 6.3% of GDP in 2024. This is despite the continued growth in mortgage loans.

In November 2024, the value of outstanding mortgage loans rose by 5.1% from a year earlier, to reach PEN 66.55 billion (US$17.73 billion), according to figures published by the Superintendency of Banking and Insurance (SBS). This followed annual growth of 5.1% in 2023, 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 November 2024:

• PEN-denominated mortgage loans: up by 6.1% y-o-y to PEN 61.74 billion (US$16.45 billion)
• Foreign currency-denominated mortgage loans: down by 5.8% y-o-y to PEN 4.81 billion (US$1.28 billion)

The total number of mortgage loans also increased modestly by 2.9% to 265,740 loans in November 2024 from 258,315 loans in the same period in the prior year.

Socio-Economic Context:

Social housing deficit

Peru's housing shortage was about 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. 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$15,316) up to PEN 479,300 (US$127,666).

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$ 966) for house purchase and PEN 2,658 (US$ 708) for home construction or improvement. Techo Propio offers subsidies, which vary depending on the purpose:

• For purchasing houses, the subsidy granted is currently up to PEN 46,545 (US$12,398).
• For building houses, the subsidy granted can be PEN 32,100 (US$8,550).
• For improving houses, the subsidy granted is up to PEN 12,305 (US$3,278).

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$11,986) to PEN 270,000 (US$71,917), 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$26,636) 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$13,318), with a maximum financing period of 8 years.

Peru's economy improving, inflation continues to ease

Despite the ongoing domestic political turmoil, the country's economic performance is improving. In the third quarter of 2024, the Peruvian economy grew by 3.8% from a year earlier, an improvement from year-on-year expansions of 3.6% in Q2 2024 and 1.4% in Q1 2024, and annual contractions of 0.4% in Q4 2023, 1% in Q3 2023, 0.5% in Q2 2023, and 0.4% in Q1 2023, according to figures released by the INEI.

Over the same period:

• Private consumption rose by 3.5% y-o-y in Q3 2024.
• Government spending increased by 4.1% y-o-y, supported by public administration and defense expenditure, education, and healthcare.
• Gross fixed capital formation also grew by 6.6% y-o-y, as the construction sector and the acquisition of machinery and equipment increased by 4.7% and 9.6%, respectively.
• For net trade, exports of goods and services surged by 10.4% while imports rose by 8% y-o-y in Q3 2024.

The International Monetary Fund (IMF) estimated that Peru's economy has grown modestly during 2024, an improvement from the prior year's 0.6% contraction.

"A rebound in growth to 2.5 percent is expected in 2024, supported by a strong recovery in agriculture and fishing, continued momentum in mining, and a looser monetary policy stance," said the IMF. "However, only a moderate recovery is expected for private consumption and private investment, as nominal wages gradually regain their purchasing power and elevated political uncertainty weighs on consumer and business confidence."

This is in line with Fitch Ratings' projections, which predicted that Peru's economic growth will be at an average of 2.5% over the next two years. "In Fitch's view, political uncertainties remain elevated, however, and restrain the recovery in private investment, which we expect this to keep growth relatively weak at around 2.5% over the next two years."

Peru experienced an uninterrupted economic growth from 1999 to 2019, expanding by an average of 4.6% annually. However, the Covid-19 pandemic dragged the economy into deep recession, with the country registering a huge contraction of nearly 11% in 2020 - its worst showing since 1989. The economy bounced back in 2021, with a real GDP growth rate of 13.4%. The country saw a modest economic growth of 2.7% in 2022 before falling into a recession again in 2023.

In December 2024, overall inflation eased to 1.97%, down from 2.27% in the previous month and 3.24% in the same period last year, according to INEI. It was the second-lowest inflation rate recorded in the past four years. In fact, it is now within the central bank's target range of 1% to 3%.

Inflation averaged just 2.9% from 2011 to 2021 before accelerating to 7.9% in 2022. Inflation remained high at an average of 6.3% in 2023 before gradually falling last year.

The labor market is growing stronger. The nationwide unemployment rate stood at 5.7% in November 2024, unchanged from the previous month but down from 6.6% a year earlier. It was the lowest level registered in the past decade.

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, to 7.8% in 2022, and further to 6.8% in 2023, according to the IMF.

Peru's political turmoil persists

Peru swore Vice President Dina Boluarte as the new president on December 7, 2022, 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, 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 at least 49 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. Then in June 2024, two human rights groups have filed a complaint with the International Criminal Court (ICC), accusing Boluarte and her government of crimes against humanity linked to the deaths of the protesters.

Early last year, Boluarte became embroiled in the so-called "Rolexgate" scandal, following allegations that she possessed a collection of Rolex watches and luxury jewelry, sparking a corruption investigation and placing her at the center of yet another controversy. In March 2024, Boluarte's home was raided as part of the ongoing corruption investigation. The inquiry began following a report by the local news outlet La Encerrona, which revealed that she had worn several Rolex watches during official events.

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

Sources:

• Índice de precios de inmuebles (Banco Central de Reserva Del Perú): https://estadisticas.bcrp.gob.pe/
• Principales Indicadores Macroeconómicos (Instituto Nacional de Estadistica e Enformatica): https://www.inei.gob.pe/
• Residential Real Estate Transactions - Peru (Statista): https://www.statista.com/
• MN Mortgage (Banco Central de Reserva Del Perú): https://estadisticas.bcrp.gob.pe/
• ME Mortgage (Banco Central de Reserva Del Perú): https://estadisticas.bcrp.gob.pe/
• Monetary Policy Reference Rate (Banco Central de Reserva Del Perú): https://estadisticas.bcrp.gob.pe/
• Créditos Directos por Sector Económico (Superintendencia de Banca, Seguros y AFP): https://www.sbs.gob.pe/
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• Techo Propio (Fondo MiVivienda): https://www.mivivienda.com.pe/
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• MiTerreno (Fondo MiVivienda): https://www.mivivienda.com.pe/
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• Human rights groups accuse Peru's president of crimes against humanity in submission to ICC (CNN): https://edition.cnn.com/