Argentina’s Dollar-Only Market Falls on Cash Scarcity

Gonzalo Demarchi’s two-bedroom house in Buenos Aires was on the market for 18 months before he was finally able to sell it, at a 25 percent discount.

That was partly because Demarchi, like most sellers, would only accept U.S. dollars as the Argentine peso weakens. It also was because the country’s mortgage market, which had been growing, is shrinking with interest rates at a five-year high, forcing most buyers to pay cash in hard-to-get dollars.

More than two years of restrictions on buying the U.S. currency are pushing down Argentina’s home prices for the first time since 2002. A weakening peso, with this year’s slide accelerating to 20 percent, is driving sellers like Demarchi to demand dollars. And with benchmark rates set at 28.9 percent to fight inflation at 37 percent, use of home loans has shriveled.

“The real estate market was so hugely impacted by currency controls because it’s priced in dollars and there’s no mortgage lending,” Jose Rozados, a director at research company Reporte Inmobiliario said in a telephone interview. “With inflation not slowing to a reasonable level anytime soon, and currency controls still in place, the situation will probably deteriorate.”

Home prices were 10 percent lower in dollar terms from a year earlier in May, according to Buenos Aires research company Reporte Inmobiliario. Only 4.4 percent of 24,408 property purchases in Argentina’s Buenos Aires province this year through May were made with mortgages, the smallest share in data going back to 1998.

Mortgage Share

Last year, 20 percent of home purchases were made with mortgages, up from 17 percent a year earlier. Homes bought with bank loans haven’t surpassed 21 percent of the total in the past 14 years.

Argentina’s three-month central bank note, the country’s benchmark lending rate, rose to 28.9 percent this year, the highest in the world, according to data compiled by Bloomberg. Benchmark rates of similar maturities in Brazil, Mexico and the U.S. are 10.7 percent, 2.9 percent and 0.1 percent, respectively.

Government efforts to jumpstart the creation of an effective mortgage market have also been unsuccessful. It has been offering subsidized rates of 2 to 14 percent to finance new houses built on state lots. Still, the government doesn’t have enough funds to offer loans to the broader population, and the 79,333 mortgages awarded since the start of the project in June 2012, hasn’t been enough to revive the housing market.

Porsche Sales

Home prices are falling even as Argentines flock to assets perceived as safer than a peso-denominated bank account -- appliances, cars, even bitcoins, a commodity promoted as a digital, or virtual, currency that isn’t subject to government control. Last year saw the biggest surge in demand in five years for foreign autos such as Porsche 911 Carrera S sports cars, sparking the government to clamp down on the purchases to stem an outflow of dollars.

Homebuyers are demanding more value for their dollars as the biggest economic contraction since 2008 and soaring inflation increase demand for hard currency. The government’s court battle with holdout bondholders denounced as “vultures” is threatening to lead to Argentina’s second default since 2001.

In illegal street markets used to skirt currency controls, the Argentine peso has slipped to 12.5 per dollar, the weakest in six months. That’s 53 percent worse than the rate in the official market, which is controlled by the central bank.

President Cristina Fernandez de Kirchner, who in July 2012 banned most dollar purchases outright after tightening controls in October 2011, this year authorized Argentines to buy foreign currency worth 20 percent of their average monthly salaries, with a limit of $2,000 per month.

No Choice

Dollars are still tight and many sellers can’t wait until currency controls ease further to get out, according to Florencia Cecchini, a real estate broker at Re/max Holdings Inc. in Buenos Aires.

“Prices had refused to budge for a while, even as sales fell, but now owners are seeing they have no choice,” Cecchini said in an interview.

Prices will fall as much as 30 percent in the next three years before rebounding, Cecchini said, citing Re/max estimates.

The average price per square meter of a two-bedroom apartment in Buenos Aires fell 10 percent to $1,693 in May, from $1,887 a year earlier, according to Reporte Inmobiliario. By comparison, prices rose 26 percent in dollar terms in Sao Paulo and 8.2 percent in Santiago.

Widening Gap

At current mortgage rates, borrowers would have to pay about 7,000 pesos per month on a loan to buy a $100,000 apartment, said Roberto Arevalo, director at Argentina’s Real Estate Chamber. The average monthly salary in Argentina is about 8,400 pesos ($1,028 at the official dollar rate).

“There’s a widening gap between the dollar price for properties and salaries in pesos,” Arevalo said. “If you add that to virtually no mortgage lending, it means the dream of owning a home remains just that for most people, a dream.”

Mortgages represented 9 percent of Argentine banks’ total lending in June, according to the country’s central bank.

Demarchi, the home seller, bought the house in 1989, at a time when prices were lower in dollar terms as a result of hyperinflation of 1,300 percent in Argentina. With the money he obtained from the house, he’ll buy a smaller property, on which he also expects to get at a reduced price.

“I would’ve never accepted an offer in pesos,” says Demarchi, a 60-year old real estate broker. “In this context of fast inflation, the dollar is the safest currency.”

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