Lima’s vibrant housing market is slowing
Last Updated: July 23, 2015
Price rises in the previous four years were even higher, so it is possible to make a case that house price rises are moderating:
- In 2010, residential prices rose by 15.18% y-o-y
- In 2011, residential prices rose by 17.89% y-o-y
- In 2012, residential prices rose by 18.13% y-o-y
- In 2013, residential prices rose by 15.49% y-o-y
The average price of homes sold in Lima Metropolitan Area rose by 7.65% y-o-y to Q2 2014, to PEN 289,260 (US$ 90,704), according to the consultancy Peru Tinsa. During the latest quarter, the average price of homes rose by 0.25%.
The slowdown is reflected in low home sales. Only around 16,930 units were sold in 2014, according to Peruvian Chamber of Construction (Capeco), down 23.8% from the previous year and the lowest figure since 2010. One factor was a mismatch between supply and demand. Despite the abundance of projects in modern Lima districts (including Jesús María, Lince, Magdalena del Mar, and San Miguel) with an average price of more than US$100,000 there is still a large unmet demand, maybe another 36% above what is supplied, consisting of potential buyers looking for homes priced under US$ 30,000, an offer almost nonexistent in the area.
The number of new housing units sold in Q2 2014 was 2,930, 41.9% down from the 5,045 sold during the same quarter of the previous year, according to Peru Tinsa.
Nevertheless, the construction sector in expected to grow by 2% by the end of 2015, according to Cesel Ingenieros' president Raul Delgado, because of higher investment by real estate companies. Around 59% of property developers are expected to raise their level of investment this year compared to last year, up from the 46% recorded in the previous survey, according to Capeco.
Peru: yields have fallen from excellent to moderate
Property prices in Peru have risen significantly over the past few years.
Smaller apartment sizes typically cost around US$1,800 per square metre, with larger apartments US$2,300 per square metre.
Rental yields in Lima are no longer as good as they were. Yields on smaller apartments have fallen in the last few years from over 13% to around 7.5%, while yields on larger apartments are nearer 5.0%).
In currency terms, Peru’s Sol has somewhat depreciated over the last two years, but by less than the Chilean Peso, Brazilean Real, or Argentinian Peso.
Rental income tax is high in Peru
Rental Income: Rental income is taxed at flat rate of 30%, without any deductions.
Additionally, leasing real estate in Peru is subject to VAT at 18%. VAT is imposed when legal entities (individuals and corporations), resident or not, rent out Peruvian properties.
Capital Gains: Gains earned by nonresidents selling Peruvian property are taxed at a flat rate of 30%.
Inheritance: There are no inheritance or gift taxes in Peru.
Residents: Residents are taxed on their worldwide income at progressive rates, from 15% to 30%.
Total transaction costs are low in Peru
Total round trip transaction costs, i.e. the total cost of buying and selling a property, are between 6.10% and 9.06%. The biggest cost is the estate agent’s fee, which is between 3% and 5%. Five procedures must be completed to register property, which can be accomplished in about 6 to 16 days.
Peru's rental laws are pro-tenant
Rent: Although rents may be freely agreed by the landlord and the tenant, strong security of tenure is given to the tenant.
Tenant Eviction: Legal proceedings to evict the tenant can be burdensome and highly time-consuming (even tedious).
Economic recovery in 2015, after 2014 slowdownPeru’s economy slowed sharply to only 2.4% GDP growth in 2014, after four years of relatively high economic growth: 8.5% in 2010; 6.5% in 2011; 6% in 2012; and 5.8% in 2013. Peru’s weakest output growth since 2009 (1% GDP growth) was caused by declining investment and weak external demand for copper. In Q1 2015 growth was only 1.7% y-o-y.
This weak growth, way below the 6% growth forecast by the Central Reserve Bank of Peru (BCRP) in December, prompted President Humala in June 2015 to ask Congress for special powers to introduce new economic reforms. These executive powers are expected to last for 120 days. The government did not reveal the details of the new reform package, however Finance Minister Alonso Segura assured that the new measures will make the country more competitive, through increased construction and manufacturing activities and reduced red tape.
The IMF predicts that Peru’s economy will bounce back in 2015 with 3.8% growth.
Unemployment reached 7.4% in May 2015, much higher than the 5.6% unemployed the same month last year, but an improvement over 8.3% recorded in January 2015.
Inflation rose to 3.54% y-o-y in June 2015, its highest rate for 13 months.