What Argentina Can Teach Us About Real Estate
Several weeks ago I made a trip over to Buenos Aires. Admittedly part of the goal of this trip was to taste the delicious grass fed beef that is so hard find here in America, but my main goal was to see whether it was worth investing in real estate there.
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Now, Why Argentina?
My initial thesis was that if the currency of a country collapses, I may have an opportunity to buy up real estate on the cheap.
If you have followed the news lately, you must have heard about the rampant inflation rampaging about the country and the country’s currency was heading down the drains. Despite the government’s insistence that inflation was not that high (hmm, doesn’t that remind you how the Western governments are all claiming low inflation despite the fact that I have to pay $6 for a dozen organic eggs?), everyone knew inflation was running at least 30% a year.
This is not new. Back in 2001, the Argentinian government devalued their currency, the peso, which was originally supposed to be pegged to the dollar 1 to 1. The epic collapse of the peso, along with the government essentially seizing Argentinians’ dollars and forcibly converted them into, threw the economy into chaos for quite awhile. Everyone lost their savings. Everything became ridiculously expensive for locals but on the other hand remained cheap for people who still held real dollars beyond the grasp of the government. I’ve read a story of how someone was able to rent and renovate 3 hotels back in 2001 with only $40,000!
As a Result of all This Mess…
Argentinians have learned to not trust their currency as well as their banks (as if what happened in Cyprus hasn’t taught us that we shouldn’t keep all our money in banks already). Today, Argentinians mostly try to convert their earnings into American dollars because they think the dollars are much safer to hold. The government tried to control the currency by limiting anyone from trying to buy dollars. Thus, a black market for dollars was born and thriving. When I arrived there, the unofficial black market rate was 1 dollar for 10.50 pesos when the government rate was 1 dollar for 7.8 pesos (and this was after a recent official devaluation already). You can see the daily rate here. At certain point it went as high as 13 pesos, signaling a truly lack of confidence in the currency.
Well, if you think when 2011 the exchange rate was 1 dollar to 4 pesos, I must be heading for some great deal right now! However, what I learned was that the many apartments and houses were listed in US dollars! The Argentinians lost so much faith in their currency that when it came to a huge transaction, they wanted something that actually held its value (I know, I know some of us are losing faith in the American dollar, but I suppose that what the US dollar to Argentinians is like what gold is to Americans). Real estate in Argentina, in fact, has become a true storage of value for Argentinians.
I admire them quite a bit in this aspect. They have learned that putting money in their banks is risky. They have learned to live with massive 30% year to year inflation. They have learned how, despite all the government controls, they can protect their net worth. Some people are converting their earnings into US dollars at the end of every paycheck and put it in a safe in their house. Some people are accepting US dollars instead of pesos. And a lot of people have learned after 2001 that real estate is something that they can maintain true value. And it shows given that they aren’t willing to sell their houses for pesos, but instead, a safe storage of value, the dollars.
So, in the end, I didn’t really find a big bargain going down to Argentina. The real estate prices have fallen a bit but not much. Most people are holding on to them and not selling. Granted, you can have a great life down there without spending too much, but this market is certainly not like Vegas-Phoenix-Miami 2011. It is not worth the risk to go down there for me. The beef, however, is totally worth it.
The Truth of the Matter
While I can go on and on about Argentina, the truth of the matter is, owning real estate can truly store your wealth. Even if a country’s currency goes down the drain, owning real estate protects your life savings. The world has shown us that governments can take our savings, banks can take our savings, but what has been harder to take is your real estate (though some might argue the Communist regime in China back in the days took everything in the name of communism). So next time, if you’re banking your retirement on stocks, cash or pension, just remember what happened in Argentina can happen in America or in wherever you live. Don’t always trust the government and buy some real estate.