Magazine article Real Estate Issues

Devaluation and Real Estate Values: The Argentine Case

Magazine article Real Estate Issues

Devaluation and Real Estate Values: The Argentine Case

Article excerpt

ON JANUARY 7, 2002, ARGENTINA ABANDONED THEIR EXCHANGE BOARD, a law known as the Convertibility Act, that pegged the national currency on a par value with the U.S. dollar. This left the peso's value to be determined by supply and demand of the dollar on the free market. As a result, the peso lost nearly 66% of its value in a few months compared to the dollar.

What impact did this major currency depreciation have on the values of real estate assets in Argentina? What is the past and present relationship that such a tremendous devaluation has had and is still having on the value of real estate assets? In what manner did it influence the quotations and transaction prices of residential units? Were these values evenly adjusted to the new financial situation? What was the influence of the law, passed in December 2001, prohibiting the withdrawal of bank deposits to avoid capital flight from banks and a programmed permission for the later withdrawal of these funds?

This paper will describe the changes in the value of residential properties and the significance of their geographical situation in this period of post-convertibility.

BACKGROUND

From the year 1991 to December 2001, that is, for a full decade, Argentina was governed by a law that ensured the conversion of the peso at par value of one to one to the American dollar, known as the Convertibility Act.

Nevertheless, the price of home units, especially those located in Buenos Aires, the capital city of Argentina, was typically quoted in U.S. dollars. Common market practice held that real estate values were quoted in U.S. currency or pegged to the dollar exchange quotation on the date of valuation.

Memories of hyperinflation and previous devaluation experiences caused Argentine savers to seek protection under the American currency umbrella as a means of taking care of their capital in face of possible economic upheavals.

During the second half of the decade of the '90s an average of 1,000 USD per square meter for apartment units in Buenos Aires was the usual price. There were, of course, various quotations for the different areas of the city which were related to the quality of the environment, means of transport, availability of commercial supplies, homogeneity of architectural styles and socio-cultural level of the neighborhood.

The northern part of the urban area was the one with the highest values. The other end of the city, the southern area, had the lowest valuation figures. The existing gap between prevailing values in either location quoted for units of similar building quality was rarely higher than 33%.

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POST-DEVALUATION PANORAMA

The process that resulted in the currency devaluation in the first days of January 2002, started during the last semester of the preceding year. Previous to this situation, a financial crisis that resulted in an official restricting of cash withdrawals from bank deposits and savings (known as "corralito") which would also effect the real estate market's performance.

One of the first consequences of the financial crisis was a credit restriction that drained liquidity from the marketplace.

Added to the restrictions on cash circulation, resulting from the "corralito," there was a general uncertainty about the magnitude of the depreciation of the peso value with respect to the U.S. dollar. Strategically, pesos were quickly traded directly for dollars if at all possible.

As from the repeal of the legal exchange "corset," the value of the American currency at the free exchange market went quickly from par up to double the value of the Argentine peso, reaching different levels that even quadrupled and later stabilized at 2.85 / 2.95 pesos per dollar unit by the first quarter of 2003.

The above situation was expected to cause a remarkable drop in real estate transactions but, in fact, that did not happen. …

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