Real Estate Activity in Argentina is Declining Sharply.
As the New Year starts, Argentines will be looking to put last year’s real estate sector results behind them. According to a new survey, real estate activity in 2012 dropped by nearly 40%, making it one of the worst performing years in the country in the last decade. Activity for transactions involving assets that were already on the market dropped by nearly 80%.
Argentina’s economic growth has slowed, which is one reason for the slowdown. Following a recorded growth rate of nearly 9% in 2011, economic growth in 2012 is projected to be less than half of that. Even if domestic demand, industrial development, and export prospects are all promising, Argentina’s economic growth in 2013 is unlikely to exceed 3.5 percent. This has placed downward pressure on investment return rates, homebuyers’ ability to make down payments and pay their mortgages, and banks’ willingness to lend. homes
More importantly, in the heavily dollarized Argentine real estate market, real estate sellers are constantly insisting on obtaining dollars at a time when they are becoming increasingly difficult to acquire. Argentina has taken a variety of steps to hold dollars in the country, which it requires to service foreign currency debt obligations and protect the peso’s value. These limitations have essentially made obtaining US dollars on the open market for the purpose of making dollar-denominated real estate transactions exceedingly difficult, if not impossible.
The fact that Argentine inflation is rapidly eroding the peso’s buying power is exacerbating the effects of currency restrictions. Although the precise rate of inflation in Argentina is disputed, the fact remains that inflation is destroying economic wealth faster than most peso-denominated investments can generate it. As a result, real estate investors, especially those who bought in cash and aren’t under any pressure to sell, are opting to either wait for Argentina’s economic situation to stabilize or for sellers to pay in dollars.
The widening gap between Argentina’s official dollar/peso exchange rate and the price of dollars in parallel currency markets is making sellers more hesitant to keep local currency. Although the official exchange rate for one dollar was 4.325 pesos in January 2012, the “blue” dollar was trading at 4.745 pesos in the parallel market. The official exchange rate for one dollar was 4.95 pesos a year later, while the “blue” dollar was trading at 7.25 pesos. Although some of the recent increase in the dollar’s parallel market value can be attributed to the fact that it is currently summer vacation season in Argentina, and Argentine tourists need dollars for trips abroad, it also reflects perceptions that the peso is overvalued.
Given current market sentiment, a bleak economic growth outlook, and poor foreign investor trust, it’s hard to see real estate activity picking up significantly in the first quarter. Apart from political developments, the main question will be if inflation rates fall, which will relieve upward pressure on the dollar and provide space for growth in the peso-based real estate market.