Why rent is more expensive – 06/03/2023 – Market

For many people in Latin America it is not easy to find a house to rent due to rising prices.

With the wave of global inflation, wages lost purchasing power, while the cost of credit reached record levels.

As it is very expensive to buy a house due to the frantic increase in interest rates, many prefer to rent a house, which increases the rental price.

This upward trend started towards the end of the Covid-19 pandemic, but the biggest increases occurred in 2022.

“Part of the rise in prices is explained as a recovery after their fall during the pandemic,” Vinicius Oike, an analyst at Grupo QuintoAndar, told BBC News Mundo, the BBC’s Spanish-language service.

“Prices rose and fell in the shape of the letter U,” he says.

But there are cities, he points out, where values ​​have risen far beyond a simple recovery.

According to data compiled by the rental website QuintoAndar, considering prices announced on online platforms, between March 2022 and March 2023, the average cost of renting an apartment rose 126% in Buenos Aires; 12% in Mexico City; 11.2% in São Paulo, 10.9% in Quito, and in Panama City and 6.3% in Lima.

Buenos Aires: ‘It’s the law of the jungle’

With an annual inflation of almost 109%, Argentina is the most affected country in the Southern Cone.

“Paying the rent is very difficult for me,” says Paula Serenelli, a 35-year-old head of household who lives with her son in Villa Lugano, in Buenos Aires.

“Last year they raised the rent by 90%, and this year could see another bigger increase. That’s outrageous.”

Something similar happened to Gastón Levy, 38, who lives in Palermo, a high-income area of ​​Buenos Aires where it is not uncommon for rents to outpace rising inflation.

“They increased by 87%, which is good if you look at the index in relation to inflation, which was higher”, he says. “But other people get an average 60% increase every six months.”

Although there is a law that regulates the rental market, “in practice it doesn’t work”, says Gervasio Muñoz, president of the Tenants Association. “Rentals in Argentina work under the law of the jungle.”

Experts predict that while inflation in the country does not fall, rent prices in Buenos Aires will not fall either.

In the rest of the region’s largest economies, escalating inflation is hitting households hard, but far from the dramatic levels experienced by Argentina.

Mexico City: ‘I’m looking to rent and it’s difficult’

In Mexico, where inflation hovers around 10%, the price of rents in the capital follows a trend similar to or slightly above the general increase in the cost of living.

“The rents have been readjusted between 10% and 15%, on average”, says Leonardo González, real estate analyst at the company propiedades.com, referring to the rise in values.

According to González, the increase in prices is explained by the general increase in inflation, a lower demand for real estate loans (which makes more people seek to rent) and a growing preference for places with more space for home offices.

In specific neighborhoods of Mexico City, where people with greater purchasing power live, rent increases have reached up to 40%, says the expert.

This escalation is related to the arrival of “digital nomads” who, in many cases, receive salaries in dollars.

The most central neighborhoods are “gentrifying”, says Óscar García, who lives in Colonia del Valle and whose rent for his apartment has increased by 30%.

“I’m looking to rent and it’s difficult,” he says. “Many foreigners arrived who can pay high prices and there are houses that are rented exclusively through Airbnb.”

Expert projections suggest that the price of rent in Mexico City will continue to rise.

“The year 2023 will be characterized by an upward trend in prices. We project an average increase of 12%”, says González, noting that the index may also vary depending on the country’s general inflation.

In other Latin American capitals, rent price increases were smaller.

Bogotá: lower than general inflation

When rental contracts are renewed in Colombia, prices are adjusted according to the inflation rate recorded in December of the immediately preceding year.

If this rule were fulfilled, the increase in current values ​​would be 13%, which was the CPI (Consumer Price Index) of December 2022.

However, in practice, many negotiations do not follow this trend.

The problem, point out those dedicated to the rental business, is that landlords often lose out by lowering prices, especially when renting is essential for their income.

“For many people, what they get from rent is a kind of pension,” says Liliana Báez, an independent realtor in Bogota.

The other side of the coin is tenants who cannot afford a 13% increase in the rent price.

Ultimately, negotiation is what defines the real price increase, says Sergio Olarte, chief economist at Scotiabank Colpatria.

Although the National Administrative Department of Statistics (Dane) has not released data on rent prices broken down by city, Olarte estimates that Bogotá followed the trend at the national level, with an increase close to 7%.

The behavior of prices in the future will largely depend on what happens to general inflation in the country.

São Paulo: the microapartment boom

Among the megacities of Latin America is São Paulo, the largest commercial and financial center in Brazil.

In the city, the value of rents rose about 11% in the last year, according to QuintoAndar.

After the pandemic, there was a kind of real estate boom in São Paulo, both in the sales and rental markets.

People, especially younger people, have been looking for so-called micro-apartments, which can be less than 30 square meters and are usually built near subway stations.

These micro-apartments tend to be expensive due to their favorable location.

And, looking to the future, experts suggest that the index should continue to rise due to the lack of available land to build in the most accessible areas.

If there is little land available and high demand, the result is an increase in sale and rent values.

Lima: ‘Prices will continue to rise’

Despite the political and economic crisis that Peru is going through, prices in the rental market in Lima have not dropped.

The increase is smaller compared to other Latin American cities, but the average value continues to rise, despite the large differences that exist between one district and another.

“This year, all neighborhoods have prices above those before the pandemic”, explains Luciano Barredo, marketing manager at Grupo Navent.

When analyzing the prices offered in the rental advertisements, the average increase in the last year in Lima reaches 6.3%.

However, points out Barredo, the value disclosed in the advertisements tends to fall in the negotiations.

So, taking that into account, the rise in Lima is closer to 2.8%, explains the expert.

This phenomenon, according to him, is influenced by factors such as general inflation —which closed at 8% last year—, the drop in home sales due to high interest rates on mortgage loans, the exchange rate and the uncertainty caused by the country’s political context.

Added to this panorama is the fact that “in the metropolitan area of ​​Lima there is very little land available and building materials have gone up a lot after the pandemic”, says Barredo.

In this context, “it is almost impossible for prices not to continue rising”.

Santiago: below inflation

With inflation close to 10% at the end of April, rental prices have not followed this trend in the Chilean capital.

“The value of rent grew much less than inflation”, says Daniel Serey, manager of studies at the real estate portal TOCTOC.

“For people’s pockets, the square meter of rent rose 2.1%, but if we look at it from another point of view, the price really dropped”, says Serey.

How is this divergence explained? The analyst argues that in Chile many rents are fixed in relation to the rise or fall of an index called the Unidad de Fomento, better known as the UF.

So, “if we correct the rent price for inflation and convert to UF, the price actually dropped by 9.5%.”

As much as you look at the numbers, the point is that in Santiago the value of rents has not risen as it is happening in other capitals.

“The rent price is not going up now because the housing situation is complex,” says Serey.

“The real estate market in Chile is under very strong pressure because there is a very large housing deficit. We are experiencing a phenomenon of explosion of informal housing, of camps”, he adds.

“The economic situation is more decelerated. Fewer people buy houses and they only have to resort to the rental market”, says the analyst.

As long as builders continue to create new projects, prices will be contained, he added. But if the industry stops building houses at the rate it has been building so far, prices will rise.

In the case of Latin American cities where the value of rents has risen rapidly, Vinicius Oike, from QuintoAndar, projects that “the market should cool off” this year and next, as economic growth will be lower.

This will depend a lot on how the combination of growth, inflation and interest rates in each country evolves, in addition to economic news that may arrive from abroad.