Building vs buying (and the great hunt for the brecha cambiaria)

[LuckyLuke]

Howdy folks,

I've been curious about the economics of buying vs building a home, which varies greatly depending on the costs and, for those of us earning in dollars, can in turn vary greatly on the brecha cambiaria.

The debate of these two options reminds me a lot of the debate between buying a US house when prices are higher (but mortgage rates are lower), or buying when the price is lower (but mortgage rates are higher) with the plan of eventually refinancing. Both involve risk, intuition and occasional failure.

Now, many argentines I know closely still wholly put their faith in the USD and will happily tell me to sit tight and wait for the brecha to return (while they invest in Plazo Fijo instead).

So the great question is how long is a wait? The question, gnawing at the back of so many of our minds, brings me to the following chart:

Now this is a very curious chart for the inexperienced new arrival (such as a myself) because it shows that the brecha really is a temporary distortion in an otherwise pretty stable market. Milei has reduced the brecha to 35-45% and it's expected, once the Cepo is lifted, that the great "unification of the rates" will bring it to zero. All will be great and the IMF's tears of joy will water the drought parched fields of this country.

THIS BRINGS US TO THE GREAT GAMBLE!

Questions, ladies & gentlemen:

1) Is the current brecha as good as it will get during the administration of Milei? E.g. we can expect at worst, with the lifitng of the Cepo that the brecha will go to zero? Or do you see Milei running out of resources to stimulate pesos (the dreaded drought returning perhaps? YPF embargo? Milei buying a hundred more warplanes?).

2) Do you expect, much like the swings in US politics, that a peronista administration will follow Milei and with it the wacky cowboy days of fiscal insanity and plundering of foreign reserve with wanton abandon? Or could a relatively benign government follow that changes very little of the cepo or brecha?

3) Would you stash your squirrel nuts, sit on your hands (renting) and wait for such a brecha before building, knowing that it would need to last the 3-5 years required to build a home down here? Or would you build or buy anyway and to hell with timing the dollar market altogether?

Opinions and armchair prognostications please!

 

[redlobster]

1) Is the current brecha as good as it will get during the administration of Milei?

Imagine you want to buy an apartment in Argentina, and you think of the cost in terms of something tangible, like empanadas. Say, right now, buying that apartment would cost you the equivalent of 10 years’ worth of empanadas. (It's not actually empanadas, but rather "the cost of living," but it's easier to reason using empanadas.) Both you and the seller agree that this is essentially a fair valuation. Now, imagine that the government suddenly removes the gap between the official and black market dollar prices. Would the seller be willing to sell the apartment for 7 years’ worth of empanadas?

My point is, unless you are involved in things like import-export, the gap is relatively unimportant. The price of the apartment in dollars will adjust to reflect the expected cost of living over a certain number of years. If you had not decided to buy the apartment, what other things could you spend your money on? The seller would still want the price of 10 years' worth of empanadas, not 7 years' worth.

 

[FrankPintor]

Howdy folks,

I've been curious about the economics of buying vs building a home, which varies greatly depending on the costs and, for those of us earning in dollars, can in turn vary greatly on the brecha cambiaria.

The debate of these two options reminds me a lot of the debate between buying a US house when prices are higher (but mortgage rates are lower), or buying when the price is lower (but mortgage rates are higher) with the plan of eventually refinancing. Both involve risk, intuition and occasional failure.

Now, many argentines I know closely still wholly put their faith in the USD and will happily tell me to sit tight and wait for the brecha to return (while they invest in Plazo Fijo instead).

So the great question is how long is a wait? The question, gnawing at the back of so many of our minds, brings me to the following chart:
View attachment 9905
Now this is a very curious chart for the inexperienced new arrival (such as a myself) because it shows that the brecha really is a temporary distortion in an otherwise pretty stable market. Milei has reduced the brecha to 35-45% and it's expected, once the Cepo is lifted, that the great "unification of the rates" will bring it to zero. All will be great and the IMF's tears of joy will water the drought parched fields of this country.

THIS BRINGS US TO THE GREAT GAMBLE!

Questions, ladies & gentlemen:

1) Is the current brecha as good as it will get during the administration of Milei? E.g. we can expect at worst, with the lifitng of the Cepo that the brecha will go to zero? Or do you see Milei running out of resources to stimulate pesos (the dreaded drought returning perhaps? YPF embargo? Milei buying a hundred more warplanes?).

2) Do you expect, much like the swings in US politics, that a peronista administration will follow Milei and with it the wacky cowboy days of fiscal insanity and plundering of foreign reserve with wanton abandon? Or could a relatively benign government follow that changes very little of the cepo or brecha?

3) Would you stash your squirrel nuts, sit on your hands (renting) and wait for such a brecha before building, knowing that it would need to last the 3-5 years required to build a home down here? Or would you build or buy anyway and to hell with timing the dollar market altogether?

Opinions and armchair prognostications please!

Interesting analysis. To give a quick and simple answer, the architect who helped us get our house finished said it's better to buy rather than to build at the moment. Peso inflation and scarcity are affecting the prices of building materials.

And secondly (not following your 1, 2, and 3 scheme, sorry), why is the "brecha" important? Real estate prices are denominated in Dollars for the most part, and if you try to mandate Pesos in a construction contract ("llave en mano" type of contract with everything included), you will be arguing about the price every month with Peso inflation. Some peace of mind and not having to renegotiate everything every couple of weeks have some value I think.

We are finally in our own home here, about an hour north of CABA, almost a year late and after going through 3 teams of contractors. If there's any interest I can share the saga. It's ugly, not for the faint-hearted.

 

[LuckyLuke]

Interesting analysis. To give a quick and simple answer, the architect who helped us get our house finished said it's better to buy rather than to build at the moment. Peso inflation and scarcity are affecting the prices of building materials.

And secondly (not following your 1, 2, and 3 scheme, sorry), why is the "brecha" important? Real estate prices are denominated in Dollars for the most part, and if you try to mandate Pesos in a construction contract ("llave en mano" type of contract with everything included), you will be arguing about the price every month with Peso inflation. Some peace of mind and not having to renegotiate everything every couple of weeks have some value I think.

We are finally in our own home here, about an hour north of CABA, almost a year late and after going through 3 teams of contractors. If there's any interest I can share the saga. It's ugly, not for the faint-hearted.

Thank you Frank. I wasn't aware that construction contracts were denominated in dollars. I was under the impression that labor and material "stages" would be quoted in pesos as one stage progressed to the next. Stages for example being: paperwork (architecture, permits etc.), the land prep (leveling, digging, foundational pipes), the external support structure, the walls and interior, landscaping.

 

[LuckyLuke]

Imagine you want to buy an apartment in Argentina, and you think of the cost in terms of something tangible, like empanadas. Say, right now, buying that apartment would cost you the equivalent of 10 years’ worth of empanadas. (It's not actually empanadas, but rather "the cost of living," but it's easier to reason using empanadas.) Both you and the seller agree that this is essentially a fair valuation. Now, imagine that the government suddenly removes the gap between the official and black market dollar prices. Would the seller be willing to sell the apartment for 7 years’ worth of empanadas?

My point is, unless you are involved in things like import-export, the gap is relatively unimportant. The price of the apartment in dollars will adjust to reflect the expected cost of living over a certain number of years. If you had not decided to buy the apartment, what other things could you spend your money on? The seller would still want the price of 10 years' worth of empanadas, not 7 years' worth.

Thanks Red, this all makes sense for the purchase price of a built house. But how much is a bag of concrete or an albanil's salary with the brecha a 0% vs 100%. Are you telling me that the brecha doesn't make building a home any cheaper?

 

[FrankPintor]

You can denominate the construction contract however you live, but we figured that if it was in Pesos we would have multiple arguments about how the poor contractor can't afford to finish the job for the price set. I believe we were correct, having a Dollar contract wasn't a problem.

Materials, for whatever reason, seemed to follow the Dollar. Without justification, in my view, sand, cement, ceramics and so on aren't imported, but that's how it was. Unless the materials were scarce, in which case the Peso price was even higher.

@LuckyLuke, would you make individual contracts for each milestone of the project? We had milestones, of course, broadly following your ones, as part of what should have been a fixed-price turn-key project. Part of our problem was that the contractor said, hey, I need to buy materials now for a good price, so you need to give me more money now. That's how the contractor gets to the end of the money before the end of the house-building, and then says, well I need more money to finish

 

[Lisandra]

Imagine you want to buy an apartment in Argentina, and you think of the cost in terms of something tangible, like empanadas. Say, right now, buying that apartment would cost you the equivalent of 10 years’ worth of empanadas. (It's not actually empanadas, but rather "the cost of living," but it's easier to reason using empanadas.) Both you and the seller agree that this is essentially a fair valuation. Now, imagine that the government suddenly removes the gap between the official and black market dollar prices. Would the seller be willing to sell the apartment for 7 years’ worth of empanadas?

My point is, unless you are involved in things like import-export, the gap is relatively unimportant. The price of the apartment in dollars will adjust to reflect the expected cost of living over a certain number of years. If you had not decided to buy the apartment, what other things could you spend your money on? The seller would still want the price of 10 years' worth of empanadas, not 7 years.

"My point is, unless you are involved in things like import-export, the gap is relatively unimportant."

That is nonsense. A local builder buys the materials and labor in pesos; not dollars and then integrates those peso costs into the (likely) dollar denominated total cost.

 

[redlobster]

That is nonsense. A local builder buys the materials and labor in pesos; not dollars and then integrates those peso costs into the (likely) dollar denominated total cost.

That's only if you're lucky. He might even decide to charge you two dollars for every peso he spent. Then you're in real trouble (assuming you have a habit of agreeing with everything you're told).

 

[LuckyLuke]

You can denominate the construction contract however you live, but we figured that if it was in Pesos we would have multiple arguments about how the poor contractor can't afford to finish the job for the price set. I believe we were correct, having a Dollar contract wasn't a problem.

Materials, for whatever reason, seemed to follow the Dollar. Without justification, in my view, sand, cement, ceramics and so on aren't imported, but that's how it was. Unless the materials were scarce, in which case the Peso price was even higher.

@LuckyLuke, would you make individual contracts for each milestone of the project? We had milestones, of course, broadly following your ones, as part of what should have been a fixed-price turn-key project. Part of our problem was that the contractor said, hey, I need to buy materials now for a good price, so you need to give me more money now. That's how the contractor gets to the end of the money before the end of the house-building, and then says, well I need more money to finish

Howdy Frank,

Interesting comments. I had a chance to speak to a friend of the family who owns a hardware store here. He confirmed that raw materials inexplicably tend to move in tandem with blue but aren't as tightly pegged to it as land. He also mentioned that regardless of a high or low brecha, slow periods allow much more negotiating room for costs.

I would love to hear some tips from you on what you would avoid if you were to do it again, assuming you would do it again!

 

[Bajo_cero2]

You cannot build. The bag of cement was 900 pesos when Milei assumed as President and now is 11.000 and the USd is the same since then.