The BCRA has issued Communication A 5945 to implement a new savings and loan scheme that may radically change access to housing in Argentina. This initiative aims at encouraging economic development with social equality, one of the mandates laid down in the Charter of the BCRA.
The instruments under this new scheme will be stated in housing units (unidades de vivienda, UVIs). The initial value of one UVI as of March 31, 2016, will be set at a thousandth part of the average standard construction cost per square meter on the basis of available figures for different types of real property located in the cities of Buenos Aires, Córdoba, Rosario, Salta and the coastal zone (Santa Fe de la Vera Cruz-Paraná) weighted by population. As the standard square meter is priced at ARS14,053, the initial value of one UVI will amount to ARS14,053.
The value of a UVI will be daily updated by the reference stabilization coefficient (coeficiente de estabilización de referencia, CER) based on the consumer price index. As shown in the annex to this press release, there is a clear correlation between this index and the construction cost, but the former is less volatile. Thus, 1000 UVIs will approximately suffice to build one standard square meter at any time in the future. The BCRA will post the value of the UVI on its website on a daily basis.
Benefits for Depositors
Argentine households, regardless of their purchasing power, will be able to save in UVIs and, therefore, have access to an instrument protected from inflation, which is similar to safeguard savings by buying real estate.
The new savings scheme consists in time deposits for a minimum term of 180 days. There may be time deposits for longer periods, with an early withdrawal option after 180 days.
Benefits for Borrowers
A credit market in UVIs has the potential to enlarge access to mortgage loans, which today only represent approximately a hundredth of the GDP.
Since they are denominated in UVIs, the interest rate on these loans will be a real interest rate, which the BCRA expects to be around 5%. Thus, the payment of a mortgage loan under this new scheme is similar to paying one month’s rent, which is usually a fixed percentage of the value of the property and is adjusted based on the price level of the economy.
In order to fully understand the impact of the new facility, it is worth comparing the installments in pesos under this new kind of loan and those under a standard fixed-rate loan available on the market today—in both cases with a term of 15 years. Under the new scheme, the remaining principal is updated based on the general price level, so that each payment under the loan in pesos increases over time, but its real value remains constant, that is, in UVIs.
A major advantage of this scheme consists in that payments are significantly smaller than those of a traditional loan, especially at the beginning. In a traditional fixed-installment loan, initial installments must be very high to compensate for the fact that inflation can reduce the value of subsequent installments. This creates a huge barrier to credit access, which then remains available to high-income households only.
The initial value of installments is much more accessible under the new scheme. In fact, the value of the installments is lower than that of the standard fixed-rate loan currently available on the market[2] for almost the entire duration of the loan using the inflation path set by the government[1]. This is because the interest rate on these loans has an implicit high inflation rate throughout the period, while the monetary authority is determined to bring inflation down sharply in the coming years (see charts).
Reducing installments dramatically expands access to mortgage loans. For example, assuming an installment-to-income ratio of 30%, a standard loan for ARS1 million requires a monthly income of ARS68,609. For a loan in UVIs, the required monthly income is ARS26,855. A table with the required monthly income for different loan amounts under each scheme is attached for clarity.
Banco Ciudad, Banco Macro, Banco Provincia, Banco Hipotecario, Banco Galicia and Banco Santander Río have agreed to launch these loans in the first stage. The BCRA hopes and encourages all institutions to offer these types of loans.
Moreover, the scheme in UVIs can be used for any other type of financing, such as pledges, or personal or business loans, for terms of 1 year or more.
Annex. Comparing the Consumer Price Index and Various Construction Costs
1993-2015: Comparing the Consumer Price Index and the Construction Cost (INDEC)
For provinces, the figure used was the average published in the blog Cosas Que Pasan
