2012 Could be Worst Year for Argentina's Property Markets in Over a Decade

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The Argentine real estate market has witnessed stunning growth over the last decade.

According to the "2001-2012 Relevamiento de Mercado Inmobiliario en la Ciudad de Buenos Aires" (Overview of the Buenos Aires Real Estate Market  2001-2012) prepared by the Urban Development Ministry of Buenos Aires, the price of land between March 2002 and December 2011 increased from US $272 to US $1,680.2 per square meter.  Between 2001 and 2011, apartment prices increased from US $891 to US $2,168 per square meter.

Apart from Argentina's strong economic growth after 2003, the real estate market growth was powered by the increasing purchase by Argentines of real estate as a defensive hedge in the face of increasing inflation and concerns about banking system stability.   These purchases became, in a sense, a second-resort fixed asset alternative to traditional capital market investment options.  Regardless of the implications of substituting real estate purchases for banking sector transactions for the Argentine financial system as a whole, it was clearly the case that the real estate market heavily benefited from both the positive and negative elements of Argentina's economic situation. 

Like the tango "La Cumparsita", however, the growth of the real estate sector appears to have come to an abrupt and dramatic end.  According to iprofesional.com, property purchases and sales in Argentina could drop 60% for two consecutive months, representing the worst fall in a decade.   Echoing this slowdown, it has been reported that in June square meters approved for construction dropped approximately 50% year on year. 

Issues related to the market freeze go far beyond a mere decline in real estate sales volumes.  According to one source, more than 100 real estate companies have shut their doors in Buenos Aires and thousands of construction industry workers have lost their livelihood.  An estimate has put this number at an incredible 75,000 workers, a significant portion of the construction workforce.  This number of out of work construction professionals is indicative of the large number of projects that have now been stalled.

In addition to the general drop in real estate activity, a key factor forcing the market down is the unwillingness of sellers to accept Argentine pesos, for fear of their declining purchasing power given high rates of inflation that many believe are significantly higher than officially reported levels.   The spread between official and unofficial currency markets has now reached approximately 36%.

As sellers have increasingly insisted on receiving payment for properties in US dollars, it has become increasingly difficult for buyers to find them.   Most forms of foreign currency purchases are prohibited, and Argentines must apply to the national tax agency AFIP to purchase dollars.  These requests, in the face of declining foreign reserves as a consequence of foreign currency denominated debt payments and general downward pressure on the national currency have been granted with less frequency.

Given the drop in market activity, it might be expected that prices would fall, but values have remained stubbornly high as sellers continue to bet against the future of the peso and buyers remain convinced that real estate investment remains the lesser of other market evils.

Help is also not coming from foreign investors looking for bargains.  Due to the weakening economic environment and concerns about government policy, investors have pulled approximately US $2 billion out of the Argentine economy between April and June, an increase over the previous three month period.  This trend is not likely to turn around in the short term.

Looking forward, it is likely that inflation rates will continue to create downward pressure on the peso, which will in turn cause the government to strictly monitor foreign currency market access.  It is likely that the gradual "pesification" of the real estate market due to effective restrictions on dollar-based deals will usher in a market adjustment period that will leave significant price volatility in its wake.