Argentine Housing Bust Has Government Dialing for Dollars

In a region where booming real estate markets have governments from Chile to Brazil to Colombia warning of potential property bubbles, Argentina stands out as a bust.

Two years after President Cristina Fernandez de Kirchner clamped down on Argentines’ purchase of dollars, the currency of choice for real-estate transactions, the housing industry is grinding to a halt. While prices soared to records in Sanhattan, a high-end strip in Santiago, Rio de Janeiro and Medellin, Colombia, in Buenos Aires they dropped an average 1.2 percent in the second quarter from the previous three months, the first decline in data that goes back to 2005.

“The main issue in Argentina is that the real estate market has historically been transacted in dollars so when you make it impossible for people to source dollars liquidity gets disrupted,” said Bret Rosen, managing director of research at Jamestown Properties LLC in New York.

Fernandez’s foreign-currency curbs effectively put home purchases out of reach for many Argentines because they would be forced to buy dollars on the black market for 60 percent above the official rate. Sales in Buenos Aires plunged 34 percent in the first five months, the biggest decline since the 2001 financial crisis that culminated in the government’s $95 billion bond default, according to the Buenos Aires Notary College.

Tax Forgiveness

Now Fernandez is trying to revive the market by offering to forgive taxes owed on undeclared dollars if they’re invested in property. Argentines can exchange funds held abroad for central-bank issued certificates that can be used in real estate transactions and redeemed for dollars by the seller of a property.

The plan has only attracted $8.5 million since it began on July 1 because investors are wary the dollar-starved government will try to keep the greenbacks, according to Florencia Cecchini, real estate agent at Matty Pell & Asociados in Buenos Aires.

“My clients get an ulcer every time I bring up the subject,” she said. “They don’t want to hear of it because they don’t trust they’ll be able to get actual dollars.”

The Argentine government froze bank accounts and turned dollar savings into pesos at 30 percent of the value after the default.

Creditor Dispute

The country has been locked out of international credit markets since then, while decade-long cases in U.S. courts with holdout creditors from the country’s 2005 and 2010 debt restructurings demanding to be paid in full are contributing to making Argentine securities the riskiest in the world.

Reliant on local financing, the government has depleted international reserves and printed money at a rate of about 30 percent a year, fueling the fastest inflation in the Western Hemisphere. Price increases, tightening currency controls and unpredictable legislation -- including the nationalization of oil company YPF SA in April 2012 -- caused economic growth to fall to 2 percent last year, the slowest since 2009, as investment and production slumped.

Real estate is often paid for upfront as the double-digit inflation rate undermines banks’ ability to offer long-term loans. A five-year mortgage has average borrowing costs of 18 percent, according to the central bank, compared with the 24 percent inflation rate estimated by private economists. Official data, which have been challenged by the International Monetary Fund, says consumer prices are rising at half the rate.

Sales Tumble

Only 14.9 percent of all home purchases in the province of Buenos Aires used mortgages last year, down from 15.3 percent in 2011, according to Buenos Aires real estate research company Reporte Inmobiliario. The share hasn’t surpassed 21 percent in the past 10 years.

Property sales in Buenos Aires tumbled 27 percent last year from 2011, the biggest drop in Reporte Inmobiliario data that goes back to 1998, and the only the fourth annual decline after 2001, 2004 and 2009.

“The market was almost paralyzed with the currency controls because the great majority isn’t willing to accept pesos for their property,” German Gomez Picasso, a director at Reporte Inmobiliario, said in a telephone interview from Buenos Aires. “They would rather just hold on to their property instead.”

Some real estate companies are starting to price their projects in the local currency. Developer Alan Faena accepted pesos to finish selling about 25 percent of his apartment building in the Buenos Aires neighborhood of Puerto Madero, which he helped build into the most expensive in Argentina’s capital from old abandoned factories by the riverside in the 1990s.

Currency Controls

Currency controls make investing in Argentina “difficult,” he said, “You do whatever you can to adapt.”

Faena, developer of the Faena Hotel and Faena Aleph Residences, has no plans to invest more in Argentina.

Instead he is completing six projects in Miami -- a residential building, a hotel, an arts center, a shopping gallery a park and a marina -- with a $600 million investment from his partner, Ukrainian-born American billionaire Len Blavatnik. He said he’s sold 50 percent of his condominium building set to be completed in September.

Argentines seeking to escape currency controls, sluggish economic growth and rising inflation surpassed Brazilians last year and became the biggest Latin American buyers of property in the U.S. by spending $2 billion, according to a June 24 report by the National Association of Realtors.

Chilean Market

In Chile, home prices soared as much as 20 percent in December and were at record highs in April, according to the Chilean Construction Chamber. Colombia’s home prices grew an annual 5.1 percent in real terms in the third quarter, prompting Yale University’s Robert Shiller to say the boom resembles the emerging bubble in U.S. real estate a decade ago.

The government’s plan to replace dollars with central bank-backed certificates may help boost the industry, according to Juan Martin Olivera, a real estate broker and public notary at Escribania Olivera.

“We’re all waiting to see what happens with that first person who goes to the bank,” Olivera said in a telephone interview from Buenos Aires. “If all goes well, then it should bring some relief to the market.”

Sales in Buenos Aires rose an average 5.6 percent in the 10 years through 2011 as Argentines sought to store the value of their savings in real estate. The peso weakened every year since 2003 and is forecast to slide 14 percent against the dollar this year, the most in emerging markets, according to data compiled by Bloomberg.

Fernandez’s currency controls and the tax amnesty plan are set to fail as they offer temporary relief instead of focusing on slowing inflation and instilling confidence in the government’s policies, said Juan Pablo Fuentes, a Moody’s Investors Service economist in West Chester, Pennsylvania.

“They won’t be successful in attracting capital this way,” he said in a telephone interview. “Nobody will trust a government that repeatedly violates laws and doesn’t value contracts.”

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