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Speech by the Governor of the Central Bank of Argentina, Federico Sturzenegger at the 65th Annual Convention of the Argentine Chamber of Construction (CAMARCO)

Buenos Aires, October 5, 2017 - Thank you very much for inviting me to speak about the enormous opportunities that lie ahead for the construction industry.

There is little point in dwelling for long on the problems of the past. But the truth is that Argentina’s macroeconomy has been volatile for many years, a climate not conducive to the long-term development of any industry, especially construction.  

In the case of Argentina, this situation was compounded by the peculiar nature of a financial system that did not protect savers and therefore made the growth of credit impossible. Without credit, this industry cannot develop, and so the industry gradually split in two. On the one hand, a niche segment developed, building for wealthy savers who saw the real estate sector as one of the few refuges from macroeconomic instability while, on the other hand, the immense majority of the population had to resign themselves to renting, living in substandard housing or building their own homes. An economy developed where huge luxury tower residences in Puerto Madero, which impress the tourists who visit us, coexisted with large segments of the urban population living in poverty.  

According to the 2010 Census, there are approximately two million families suffering from some kind of housing problem, of which one million three hundred thousand are families in need of a new home. Although this problem affects the whole country, the regions with the greatest housing shortage are the Northeast (N.E.) and Northwest (N.W.) provinces of Argentina, with more than 10percent of families affectedi.

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Source: 2010 Census (Ministry of the Interior, Public Works and Housing)

Public works followed an equally painful decline. In a country lagging behind in comparative income levels, public works were turned into a private fiefdom. Corruption became widespread. At the same time, civil engineering works badly needed by the general population were neglected in favour of corporate interests. Corruption made businessmen hostages to politicians, and politicians were held hostage by businessmen. Not only were projects not finished on time; they did not even begin on time. The redetermination of prices turned transparency into a pipe dream. Fewer and fewer projects were completed, and the design, execution and profitability of those that were completed gradually deteriorated. Perhaps the most extreme example was under the previous administration. The government spent the same amount of money on road works in the Province of Santa Cruz (where less than 1 percent of the country’s population lives) as in the Province of Buenos Aires (where 39 percent live). Even if a strong weighting is given to federal development in these investments, it is very unlikely that these resources were put to the best possible use. For some reason, society, its NGOs and the press were incapable of reacting to all this.

It is worth comparing the effectiveness of these investments with one you all know well: the Metrobus to and from La Matanza, which will save 220,000 people 40 minutes per day in travelling time. If we take into account only working days (that is, without calculating the benefits for motorists, a reduction in environmental and noise pollution, a fall in the number of accidents, decreased wear and tear on the public transport fleet, etc.) this means a saving of more than 2,900,000 hours per month for all those people. At an average of $ 77 per hour, the Metrobus produces an annual saving of at least $2,700 million. For a project that cost $ 1,700 million, this means the cost will be recovered after only 230 days of use. Assuming an investment horizon of ten years, the Internal Rate of Return (IRR) of the project would be 159 percent per year. There is no doubt about the potential gains from public investment as long as the focus is on the economic viability of the projects chosen. This new approach has been long overdue.

Changing the outlook for the construction industry means, on the one hand, generating a stable macroeconomic framework that will prevent the drastic redistributions of wealth that Argentina has so often experienced in the past. It means growing the financial sector, defending Argentineans' savings, and bringing honesty to the State and the business community. This is unquestionably a great and pressing challenge. It has been almost two years since we launched this agenda and its effects are now being seen. As the first results appear, new and better opportunities are opening up all the time. There is growing enthusiasm for this way of working as it becomes obvious that a healthy, honest, and constructive approach produces better (and faster) results. It is these opportunities I want to talk about today.

A brief comment about the macroeconomy

As you know, the BCRA has been concentrating on the fight against inflation. In the last 14 months, the average inflation rate has been 1.6 percent per month, which represents an annualized rate of 21 percent, the lowest in 7 years. During the last 4 months the average rate has been 1.4 percent, which is equal to an annualized inflation of 18.2 percent. But the most important thing is that we are facing a process of deceleration that will continue into the future. Regardless of the ups and downs that may occur along the way, all the current forecasts and measurements of inflation expectations agree on this. The market expectations surveyed by the Central Bank indicate an expected inflation rate of 16.9 percent for the next 12 months, 15.8 percent in 2018 and 11 percent in 2019. These figures are higher than our targets for the same years, which are 10 percent (plus or minus 2 percent) for 2018 and 5 percent (plus or minus 1.5 percent) for 2019. So we still have a credibility gap we need to close in the coming months.

What is clear - and not only from the Survey of Market Expectations - is that most people are slowly starting to perceive a drop in inflation. The latest survey by the consulting firm Poliarquía shows that the percentage of Argentineans who found prices remained stable over the last month is the highest since 2006. And the median expected inflation rate from the Di Tella University’s public expectations survey has been around 20 percent for four consecutive months. During the entire period we lived with the dollar clamp, it was not even anywhere near such a low figure.

At the same time, continuing down this path of disinflation with a floating exchange rate ensures that recovery will be much more secure. The exchange rate protects against economic disturbances originating abroad. For example, if Brazil's internal problems cause its exchange rate to depreciate, the peso will naturally move with it, thus protecting the level of domestic activity. Moreover, the floating exchange rate has two additional benefits: it keeps the economy on a growth path consistent with the balance of foreign trade (if there are external imbalances, the exchange rate adjusts to correct them); and, by fluctuating constantly, it will eventually lead to the de-dollarization of the Argentine economy.

These positive effects are already being seen. In July of this year the economy grew by 4.9 percent year-on-year and the best news is that there is a generalized perspective that this will be a truly sustained growth process. Analysts participating in the Survey of Market Expectations, for example, expect growth rates of 3.0 percent for 2018 and 3.2 percent for 2019. If these forecasts are confirmed, the economy will have awoken at last from the curse of the so-called dollar clamp which, as in the story of Sleeping Beauty, sent the economy in 2011 into a dream-like state from which it could not escape.

In short, the macroeconomic outlook is increasingly stable. I am sure that in a few years we will look back and try to understand why we took so long to put our economy in order. In this respect, the way forward has now been mapped out and we will pursue this path relentlessly.

The demand for housing

Today I want to focus more specifically on the building sector and - this is the reason why you invited me, I think - its relationship to the development of credit, especially mortgages. An industry may stop growing because of a demand restriction or a supply restriction. For this reason I am going to divide my presentation into two parts. In the first part I will analyse the demand for housing and whether this is still limiting growth in the sector. In the second part I will look at the supply of housing.

I will anticipate my conclusions by stating that the growth of the construction industry has been restricted in the past by demand. But this is not the case today, or at least it does not seem to be. If demand is no longer the limiting factor, we are forced to think about supply. Here I will share with you five business opportunities for the building sector. I apologize for not being an expert on these matters (my only experience of building was a summer spent smashing bricks to make debris for a subfloor we were building in my parents’ house). But perhaps the point of view of an outsider to the industry can be helpful.

Argentina’s construction activity accounts for around 5.5 percent of gross domestic product (GDP), below comparable countries such as Colombia (8.5 percent), Turkey (8.7 percent) and Uruguay (9 percent). However, the difference with these countries is not so much the sector's potential or capacity to develop, but the way in which the activity is financed.

Barely 0.5 percent of Argentina’s adult population has a mortgage loan, forty times less than Chile and a hundred times less than countries like Sweden or Denmark, which score highest in the ranking with more than 50 percent of the adult population with mortgage loansii.

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Mortgage penetration rate in 2011 (in percentage points)

Of course, a mortgage rate of 25 percent, the going rate in recent years if one was lucky - meant paying a quarter of the price of the house in the first year. As only very high wage-earners could afford to pay a quarter of the purchase price in one year, mortgage credit had become a luxury to which only the wealthiest could aspire. Moreover, public banks in general tended to subsidize this type of loan, as the Procrear home-building programme (which initially financed those who already had a plot of land) did under the previous administration. The result was that substantial public resources were squandered on subsidizing the richest segments of society. Those who did not have access to these credits and privileges were forced to rent or endure the housing shortage.

We were all too aware that that mortgage credit had fallen behind, which is why we launched an alternative system of mortgage loans last April. These loans are updated through the Purchasing Power Unit (Unidad de Valor Adquisitivo, UVA) mechanism. This is not a new instrument: it is based on the Unidad de Fomento (UF), a CPI-indexed unit of account used in Chile. It used to be a well-known mortgage model in this country, too. Guillermo Laura and Ergasto Riva once wrote a book defending the notion, and the Association of Housing Entrepreneurs (Empresarios de la Vivienda. AEV), headed by Fernando Esquerro, presented the idea at Banco Ciudad when I was its president. I remember we were quick to see its potential. A traditional mortgage loan was like a hurdle race, except that with an interest rate of, say, 25 percent as I mentioned earlier, nobody could clear the first hurdle. It is true that inflation made successive hurdles more accessible. But what was the point of clearing the path towards the end of the race if nobody could even take part in it? Chilean mortgages denominated in UF allow all the hurdles to be matched for height. The first hurdle is lower, allowing access to more people. The business works because the subsequent hurdles are not wiped out by inflation.

In fact, this instrument has been legally available since 2002. Decree 905/2002, later ratified by Law 25,827, allows the financial sector to adjust loans and deposits in terms of the CER index, that is, for local inflation. The problem was that the official INDEC inflation figures were manipulated, which made it impracticable to use them as an indicator. It was then, back in 2013, that we did an experiment at Banco Ciudad, which we called “My House BA”. With the support of Mauricio Macri and Horacio Rodríguez Larreta, some 40 million pesos were allocated to the City Housing Institute (Instituto de Vivienda de la Ciudad, IVC), which hired Banco Ciudad to provide loans adjusted by the City of Buenos Aires (CABA) price index. The result was that the 40 million pesos were placed in just one week, and there were no problems in subsequent years. That experience eventually gave rise to the credit boom we are seeing today. Indeed, it was this pilot test, together with the return to normal of the INDEC, which allowed us to re-float the idea last year. Let me give you some concrete figures showing why that optimism was well-founded and why UVA mortgage loans have been such a success.

For 30-year UVA loans such as those offered by Banco Nación with an annual interest rate of 3.5 percent and an annual amortization of 3.3 percent of the value of the property, mortgage payments are not much higher than the cost of renting. Initial repayments on a 30-year loan of $1 million are approximately $ 5,400 per month and require an income of $21,000 per month.

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In contrast, traditional credit lines not denominated in UVA push up monthly repayments to $ 16,700 for the same amount and term, assuming a total financial cost (TFC) of 20 percent. Here the minimum household income required is $ 66,800. This shows how UVA indexing makes it possible to remove borrowing restrictions for broad sectors of society and expand access to homeownership. Since they were launched in April 2016, UVA-adjusted mortgage loans have showed a very positive performance, amounting to more than $ 27,000 million and representing 89 percent of total variable rate mortgage loans granted to families in the last few months. Thanks to this new scheme, mortgage loans have grown again in real terms after this type of credit lines had been virtually absent for almost eight years. The interest charged on these loans is approximately 5.25 percent, which is higher than Chile’s 3.19 percent but lower than Uruguay’s 6.87 percent, and clearly lower than the real value paid during the Convertibility System of the 1990s, which was 10.3 percent. In a few months Argentina has developed the most accessible mortgage loans in its history, and also in comparison to other countries.

Loans of this type were granted for more than $ 7.3 billion in September alone. More financial entities join the business each day with an ever-greater variety of products to offer. Even if remains to be done, we can only welcome this development.

As I said at the beginning, I do not believe that demand is limiting growth in the construction industry today. This is thanks to accessible loans due to the UVA revolution. Today more than one million families with acute housing needs have the possibility of obtaining a loan to buy their own home. It is clear, then, that we now need to focus on supply.

Housing supply: five possible models.

Let's talk about supply. On another occasion I said that the new context requires us to think about how to extend supply to the population as a whole. The country that only builds for the rich is a thing of the past. When you are finally convinced that the business of the next 20 years is to eliminate the country's housing deficit, we will have begun to make important progress in solving one of Argentina’s structural problems. I should explain that in the new context, the construction of housing will be, primarily, a private business, which will not need the State to grow except for the provision of public goods and infrastructure and property rights that accompany all real estate developments. In this brave new world, the only thing that will matter is the creativity that each of you brings to reducing housing costs and offering much cheaper alternatives than those available today. The business opportunities and business organization necessary to meet this demand - a demand that has been neglected for the last 40 years - will create new forms of construction. Let us see now what opportunities lie ahead.

Model 1. Densification

One thing urban planners are struck by when visiting Buenos Aires is the city’s low urban density. We can find detached houses just a few blocks from the obelisk. In Paris, on the other hand, you can walk endlessly for blocks and blocks without seeing anything of the sort. The difference is one of densification, which optimizes transport infrastructure and enables a more efficient use of the city’s resources.

These issues, which perhaps affect the City of Buenos Aires more than anywhere, make it necessary to move towards higher density housing. This type of housing could be built in every part of the City - even in areas currently considered marginal. These areas could be converted into important urban developments, with their current residents sharing in the final project. That way, both the City and its inhabitants will see a qualitative leap in the housing supply while the City itself will function more efficiently.

Model 2. The Medellin model

Jorge Fajardo, the famous mayor of Medellin, had a slogan that became his motto: “the poorest deserve the very best”. That is why I imagine ambitious town planning solutions being developed for our country with the same hallmark of high urban quality for both open and gated communities. In other words, intelligent real estate developments that generate high quality physical space, even if the house itself does not cost more than 30,000 dollars. This type of business is feasible in suburban areas, especially in the provinces, where the impact of land prices is less significant.

Model 3. The first apartment.

Increased access to loans will lead to a greater diversity of supply in the housing market. In particular, one segment that should be developed much more is small flats for young singles or couples in the early years of marriage. I imagine apartment buildings all along the Metrobus route as far as La Matanza or near the train station of Ciudadela (25 minutes from the centre of the City) or Berazategui (40 minutes from Constitución). I imagine blocks of small flats springing up all over the Metropolitan Area of Buenos Aires as public transport improves. In this way the impact of land prices will be lower, thus reducing costs and making the best use of public transport, especially the network of trains and subways. This will significantly improve the functioning of the Metropolitan Area.

Model 4. Time for a makeover ...

A major problem is how to improve existing homes. Here we are talking about families that already own some land and so are potentially ideal candidates for a mortgage loan. Since they have their own land, this improves the loan to value ratio for the property and they only have to finance the building itself.

Here there are opportunities for companies offering to demolish old houses and build new and better quality homes in just a few weeks. It is easy to imagine an almost unlimited demand for this business model, which moreover requires the use of precision logistics engineering. I imagine a succession of teams moving from one house to another as on a production line except that on an assembly line the product is passed along to the next team, whereas here it is the team that goes to the product. First the demolition crew, then the foundations crew and so on. This will be the business of speed: whoever develops techniques for finishing a house in the shortest possible time will get ahead. These techniques will surely require the use of new materials - wood, plastic and glass - in addition to traditional ones.

In this model, customers will be able to improve their homes “by appointment” in a process that could change the face of the country in just a few years.

Model 5. The mobile home.

One of the newest businesses will be that of portable homes: that is, semi-industrial houses with a structure that can be transported from one place to another. The other day I was visited by a prominent local architect who produces this type of solutions mostly for the ABC1 segment and offices. In other words, the idea already exists although, like everything else in this market, it needs to be adapted for a segment in which demand could be massive.

Let's run over the main features of this type of construction. Firstly, these houses will be financed with secured loans (not mortgages). This will lower costs and simplify procedures. But the most important thing is that they can be bought by people who do not have the title deeds to their own land, allowing them access to a home even before they are able to buy the land. Notice that this, in turn, gives people the freedom to ‘move house’ if they decide to relocate or buy land elsewhere. These customers will be owners without property, free to move around and not forced to live in precarious housing because of their title to the land is precarious.

Moreover, if the rest of the country continues to show strong growth as expected, this will greatly enable the backflow of migrants into these areas without families losing their quality of life.


In 20 years’ time there will be no precarious settlements or housing deficits in this country. Urban development will have reached the level of more developed countries. And all this will happen without taking a penny from the taxpayer. It is true that to develop some of the models I mentioned earlier, a more efficient system of land titles is required together with an urban planning code in accordance with the public’s needs. This code will continue to be the interface between private suppliers and regulators.

A country of homeowners will be a country of citizens who take pride in their country.

Managers and workers.

Galiani and Schargrodsky (2010)iii came to an interesting conclusion in their study of a group of families that had settled in a wasteland area in Quilmes. They examined a settlement in San Francisco Solano in the Province of Buenos Aires and compared families that had been given title to the property with families that had not. They found that the families with title had invested substantially more in their homes and had given their children a better education. The authors suggest that granting land titles can be a powerful tool for reducing poverty and that home ownership is a powerful tool that goes beyond having a place to live. It changes the nature of the family’s relationships and long term goals. I repeat: families that own their own homes tend to keep their children in school for more years.

But all this will be possible only if you pick up gauntlet and accept the challenge. We are not appealing to your sense of patriotism but to your business sense to develop a construction industry that does not look to the public sector, does not need the public sector, and does not suffer from the public sector: an industry dedicated to working honestly and competitively to satisfy people’s most urgent needs and an inexhaustible demand.

The result will be that we will also have a country with much more employment in the building trade. If we consider, for example, the housing deficit iv as a potential demand on the sector and make some assumptions v about its link to the construction industry, the amount spent of meeting these families' demand for housing over the next 10 years would be 1.5 percent of GDP per year. In terms of employment, it would translate into approximately 330,000 new jobs in the sector for 10 years.

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As you can see, the sector faces new challenges and a new agenda that is vitally important for the country’s development. I am sure that you will be able to carry it forward successfully.

Thank you very much.

i Centre: 10.0%; Cuyo: 10.8%; N.E.: 14.5%; N.W.: 17.1%; Patagonia: 9.1%.

ii Badev, A., Beck, T ., Vado, L. and Walley, S. (2014): “Housing finance across countries. New data and analysis “, Working Paper No. 6756, World Bank. 0

iii Galiani, S. and Schargrodsky, E. (2010): “Property Rights for the Poor: Effects of Land Titling”, Journal of Public Economics, Vol. 94 (9-10), pp. 700-729.

iv The composite quantitative housing deficit referred to here is defined as the difference between the total number of households and the total number of (recoverable) inhabited private dwellings

v For the purposes of calculation, the number of households with a quantitative housing deficit is equal to the 2010 Census figure updated in accordance with INDEC's population projections for 2017. 60m2 houses were considered at a cost of $ 18,800 per square metre (the average price for the whole country in August 2017, according to the College of Architects of Entre Ríos). The impact on GDP was calculated using the value-added multiplier provided by the INDEC on the basis of the MIP97 (especially to discount imported products). To calculate the impact on employment, the 2016 ratio was used between the number of employees (formal and informal) in the construction industry and that sector’s share in GDP. This was then multiplied by the impact in GDP percentage points already mentioned. It is worth pointing out that the impact on both activity and employment is distributed evenly over the 10 years period.

October 5, 2017

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