Crisis In Argentina’s Property Market

The World’s Wildest Boom And Bust Market—Crisis, Argentina-Style

Think Argentine real estate, think boom and bust.

Perhaps more than any country, Argentina goes through wild cycles. Real estate can quickly become cheap or dear. Count on it.

To give you a bit of background of how the going got weird, consider populist politician Juan Peron. Peron took over Argentina in 1946 and pretty much destroyed the country’s productive sector. Naturally, with such wanton destruction to his credit, Peron remains the most popular political figure in Argentina today.

Peron introduced the concept of a national wage increase. He’d go on radio and announce that as of the following month workers were to be paid 20% more (or whatever).

Typically prices would then go up more than 20%, giving rise to the Argentine expression that wages go up by the stairway, prices by the elevator.

When workers finally collected their higher wages, they discovered they had less purchasing power, not more.

So Peron would then come up with a new plan–another 20% wage increase, but this time with price controls. Businesses had to pay their workers a lot more but maintain the same selling prices.

Peron’s policy promptly led to shortages in everything from bread to gas and from tools to clothes.

To deal with the shortages, Peron came up with a third idea: The Law of Supply. The Law of Supply, still on the books today, says that if you’re in the pizza business, say, you have to continue to make pizzas no matter what. Specifically, if the cost to make a pizza comes to 100 pesos, and the maximum price permitted by the Peronists is 60 pesos, you must continue to make pizzas anyway, and suffer the loss of 40 pesos per pizza.

The Law of Supply provides that, in the event the government catches you NOT making pizzas, it can confiscate your assets.

Logically, when the Law of Supply becomes a major weapon, the government falls sooner rather than later. Boom. Bust.

Peron invented other laws, too. He came up with an official list of names, for example. You had to name your baby one of the names on the list. So Dennis became Dionissimo on your birth certificate, even though your parents call you Dennis and may be unable to speak Spanish.

Peron also required speaking Spanish, no other language, on international phone calls. The country had only a few overseas lines in those days, operators could easily monitor calls. A friend tells the story of calling his boss in Uruguay one day. He and his boss struggled with Spanish, but the law was the law. They fumbled and faked their way through it, speaking Spanish as best they could–which was not good at all. Finally the operator interrupted. “Gentlemen, you must speak Spanish.”

“But we are speaking Spanish!”

Peron came up with the original “vedas,” or prohibitions, on eating meat or bread or whatever. Say the price of meat was going up too fast. Peron would then make it illegal to sell or serve meat on a given day, say Tuesdays. He figured by lowering the demand for meat by 1/7th, prices would fall. Supply and demand, remember? Vedas never worked, for reasons you can guess. But that rarely prevented successive governments from trying them.

I remember one time the price of meat went up so much that the government of the day banned meat on Thursdays. After a few months experience with the veda, someone asked the Minister of Economy if it had helped to reduce the price of meat. “We can’t tell,” said the minister. “But we’re continuing the veda anyway.”

Argentina’s military threw Peron out in 1955. Peron wound up in Madrid, plotting his return. Among other ideas he allegedly armed a guerilla group, the Montoneros, to rattle the country. Peron figured Argentina might become such a mess that he’d be invited back. It worked. In 1974 Peron made a triumphant return to Buenos Aires and had himself elected president. He intended to deal with the rival gangs that continued to ravage the country. But before he got around to it, he died.

His second wife Isabelita (his first was Evita, of Broadway fame) succeeded him as president until March, 1976, when the military again took over. Boom. Bust.

Vicki and I moved from San Francisco to Buenos Aires five years later, in 1981. The military junta that had thrown out Isabelita was still in power. Their program of “disappearing” thousands of terrorists, friends of terrorists, people with names of terrorists in their phone books, and people with names of non-terrorists in their phone books who the government guessed were terrorists was winding down. On the economic front Argentina was going through a period of “plata dulce,” or easy money. Easy money meant an overvalued peso and expensive real estate.

Our arrival date in 1981 serves as a good time to talk about Argentina’s boom/ bust real estate cycle. When Vicki and I arrived I was still working. Like most young-comers, I figured I should buy an apartment upon arrival. That’s what you do when you’re young, right? Buy real estate in a good location and live there forever.

My savvy, sophisticated Argentine boss flat refused to let me buy into such a hot market. They’d lived the Peron boom, the Peron bust, the military bust, the military boom. “The market here is way too dicey, Paul. I bought an apartment many years ago for US$100,000. My place has been worth as much as US$350,000, as little as US$50,000. Right now we’re at the high end of the scale, no way should you buy.”

I checked with a couple of clients, who gave me the same advice.

I did what everyone suggested. Instead of buying, Vicki and I rented a luxury apartment. And Argentina proceeded to fall apart. In our first year there we lived through four coups d’etats, multiple devaluations, and an economic collapse, all accompanied by a sharp fall in real estate prices.

Vicki and I were lucky. Then again we got lucky by following Argentine rules. You should follow those rules, too. Here’s the first:

Real Estate Rule 1: Get advice from the locals, particularly people who have your best interests at heart.

A year later the carnage seemed to have slowed. Argentine real estate had hit bottom–or so I thought. Vicki and I bought a one-bedroom pied-a-terre apartment in Recoleta for 25 billion old pesos, about US$25,000. Buenos Aires was (and is) one of the world’s great cities. We were getting in cheap. I thought about Bombay and Singapore, Paris and Madrid, Rio and Mexico City. Apartments in all those great cities cost more, often a lot more.

Then things got much, much worse. A few days after we closed on the apartment Argentina invaded the Malvinas Islands, known as the Falklands in the rest of the world. Argentina was at war with Margaret Thatcher’s Britain.

Argentina lost the war. The new peso collapsed, falling from 10,000 to 50,000 against the dollar.

Mainly because of the devaluation, our new apartment’s value fell to about US$9,000.

Real Estate Rule 2: War, pestilence, and famine can happen anywhere, at any time. But they happen more often in the Third World, and most often in Argentina.

Real Estate Rule 3: When you buy overseas, you assume currency risk. Local currency swings can sharply increase/erode value.

During the war my company’s New York headquarters suggested Vicki and I leave Argentina. But we stayed, and when the war ended one of the New York big wigs came down to Buenos Aires. He took Vicki and me to dinner to celebrate the end of the pressure. We drank French champagne, French wine, ate huge steaks, all at Recoleta’s best restaurant. The boss looked at the check–about 17 U.S. dollars.

“Uh…Paul? We’re paying you a cost-of-living adjustment?”

That cost-of-living adjustment had been calculated a few months before. Argentina was expensive during the plata dulce, cheap a short time later. Boom. Bust.

Real Estate Rule 4: Overseas costs, currencies, and real estate values can jump around a great deal. In Argentina values move quicker, and further, than in most other countries.

I mentioned our apartment was worth only US$9,000 by the end of the war, but that’s only a guess. It’s an important point. During crises, real estate sales dry up. Buyers and sellers wait to see what happens. Until things settle down, rumors and guesses replace confirmed real estate values. We’ll return to this notion later, in discussing today’s Argentine real estate market.

In 1983 a friend suggested Vicki and I buy a ranch. Prime ranch land near Buenos Aires sold for only US$500 to US$1,000 a hectare. One weekend we went out of town on the train and found a small ranch a short buggy ride from the station. The ranch was about 50 hectares and had a functional three-bedroom house, barns, water, and so on. The dream asking price was US$35,000, and rather than haggle we decided to pay it. We made a firm offer.

A couple of days later in my office, my secretary said someone wanted to see me. He turned out to be the owner of what I hoped would be our new ranch. “Paul, you’ve made a good offer, a generous offer, as you no doubt know. But I have over US$200,000 invested in the place. I can’t in good conscience sell it for peanuts, even though that’s what it’s worth…peanuts.”

I said I understood. Vicki and I tried to buy a couple of other properties, including a vineyard near Mendoza, but nothing worked out.

Real Estate Rule 5: When times get very bad, only a very few buyers and sellers remain active. Any prices you read or hear about can be wildly misleading.

Our effort to buy a vineyard proved comical. We made a couple of trips to the Mendoza wine-growing region and finally chose a small place that made fine wine. We tried to buy the place, but the deal fell through. Still, I wanted to be able to buy this wine in Buenos Aires. I asked the owner what stores carried his product.

He said, “None. Just give me a call. I’ll send you the wine you want.”

I asked for his phone number. “I don’t have a phone,” he said. “But my son’s away to college, and lives in a dorm. Just call the dorm, leave a message for my son, and he’ll get back to you. You can place your order. Eventually my son will come home, and I can ship to you.”

I started to give him our address in Buenos Aires. The winemaker/owner said, “I don’t deliver to residences. We ship to a warehouse outside of Buenos Aires. You could hire a truck and driver and arrange to go over and pick up the wine.”

I asked how I would pay…by check? He said, “No checks. We don’t have a bank account. But I have a friend with a bank account, perhaps…”

By then I had given up. Guy lives without a phone, without a bank account, without distribution, he has literally no way to take an order, deliver, or get paid. No wonder he was going out of business.

Argentina eventually turned around; Argentina always does turn around. The currency stabilized. Argentina became expensive again, and our little apartment increased in value. We decided to sell the place, cash out, and head for a cheaper country, like the United States.

We got an offer on our apartment within 24 hours, from the people who owned the cafe downstairs. They wanted the phone more than the apartment, they told me. They would buy the apartment to get the phone.

I said, “Do you want to walk upstairs and see the apartment now?”

Buyer: “It has a phone, right?”

Me: “Yes. The phone goes with the apartment, it’s in the deed.”

Buyer: “We’ll take it.”

Real Estate Rule 6: Buying and selling overseas real estate can involve surprising wrinkles.

Vicki and I sold out and left, never to buy into the Argentine real estate market again–or so we thought. But in late 2001, Argentina crashed again, big time. The government once again confiscated bank deposits. The economy imploded, the peso plummeted. Again, real estate sales dried up. Boom, bust.

Hyperinflation returned, eliminating Argentina’s nascent real estate lending. Prices fell.

It’s another important point. Slow, steady inflation usually drives up real estate values, often by about the same rate as inflation. But with hyperinflation (over 100% in a three-year period), values can fall. Hyperinflation causes lending to dry up. Argentina never saw much real estate lending in the first place. Most deals were done in cash. But the rule remains useful whenever you see hyperinflation. Watch out.

Real Estate Rule 7: Real estate can be a lousy investment during hyperinflation.

Vicki and I decided to take advantage of the 2001/2002 crash. Three years later, in 2005, we bought land in a gated community outside Buenos Aires. We paid about the same as before, US$25,000, for the lot. But this time we paid in dollars, rather than pesos. At some point during the intervening period, dollars replaced pesos as real estate’s currency.

Real Estate Rule 8: When crashes occur, you typically have plenty of time to get in.

We built a house, which we enjoyed from three to six months a year.

But government policies since 2005 drove up inflation, without relief in the exchange rate. Annual costs to maintain the house, mainly for security, gardening, maintenance, and taxes, shot up from about US$2,000 a year to US$20,000 a year. Ouch. I saw those costs going much higher soon.

We were riding the crest of another boom. We sold the house in January of 2012 and got out.

As luck would have it, we sold out just in time. Later in 2012 Argentina’s president Cristina Fernandez prohibited most legal sales of dollars. Since Argentines need dollars to buy real estate, real estate transactions have plummeted. A black market for dollars quickly surfaced, but the government comes down hard on dealers. Getting dollars in Argentina today, and especially getting them out of Argentina, has become expensive.

Cristina admires Juan Peron. She says she never makes a decision without first asking herself what Peron would do. She’s moved beyond vedas and national wage increases, though, beyond an official list of names. In Cristina’s Argentina you can speak on the phone in your preferred language. Call it progress of sorts.

Then again Cristina seems intent on riveting out economic freedom, which she deeply distrusts. She punishes overseas travel, prohibits most imports, and confiscates so much of the soybean crop that producers might be losing money. She relies on price controls, currency bans, dividend approvals, and so on to keep the economy under her thumb. She nationalized Aerolineas Argentinas, she’s even taken over Argentine football.

If she dislikes the results of her policies, she covers them up. She falsifies inflation numbers, for example. Even the CIA Factbook, perhaps the world’s most careful, politically correct source, uses private estimates of inflation in this country rather than the trumped-up government figures. Because of high crime rates, Cristina has avoided publishing crime reports for four years.

Last year her price controls led to fuel shortages, which in turn led her to nationalize YPF, Argentina’s largest oil company. Now she’s having trouble getting foreign oil companies to provide money and technology to help YPF produce more. After all, would you invest in Argentina’s oil patch when your predecessor was nationalized without compensation?

Boom and bust. Count on it.

I predict that Cristina will be able to maintain control, to kick the can down the road, for quite some time. For one thing she’s very good at managing fiscal cash flow; she knows that other governments collapsed because leaders ran out of money. She’ll make sure her net cash flow stays reliable. High soybean and corn prices, mainly due to the drought in the United States, continue to fill government coffers. She’s imposed new travel taxes, and I predict she’ll eventually raise the departure tax and require that Argentines get approval from the tax authorities before being allowed to fly overseas.

One key indicator of Cristina’s future will be the Law of Supply. Cristina threatens to enforce the Law of Supply from time to time, but does very little. She doesn’t have her heart in it. If she goes ahead with the Law of Supply, and actively shuts down producers big and small for refusing to operate at a loss, she’ll be desperate. The end will be near.

At this writing, real estate prices in this country remain a mystery. Remember that Buenos Aires apartments now sell in dollars. Cristina has pretty much prohibited buying those dollars or using those dollars to buy apartments. She’s insisting that buyers and sellers operate in pesos, which few players want to do. So for the time being we’re seeing few transactions, we can only guess about trends in prices. I’ve made this point above, but it’s worth repeating. In times of crisis, like now, we see few deals. We really have little idea of what’s happening to real estate prices.

And, prices aside, here’s what you’re up against, trying to buy in this market today…

Suppose you want to buy an apartment in Buenos Aires for US$100,000. Using estimates of today’s exchange rates and fees, when you transfer that US$100,000 to the Banco Central, you’ll receive pesos at the official rate. Less fees, wire charges, and so on, you’ll get, say, 400,000 pesos. In the free (black) market for dollars, you’ll only be able to purchase about US$60,000 with that amount. The other $40,000 went to the government, disappeared in the black market, and paid fees. You’d have to bring way more than US$100,000 into the country just to buy a US$100,000 apartment.

Remember, too, that buying those dollars on the black market breaks the law, a law that Cristina enforces with renewed vigor.

I predict the economic and real estate environment in Argentina will continue to deteriorate, probably for quite some time, before things really collapse. Have patience. Wait for a full-blown crash before going in.

Paul Terhorst

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