Construction costs for housing have surpassed $2.25 million per m2, reaching a record high

The direct cost of residential construction has recorded a historic jump by breaking the barrier of $2,250,000 per square meter for the first time, which is equivalent to a price of $1,500 per m2 in pure construction values. When accounting for land costs, processing fees, general equipment, and professional fees, projects in the pipeline reach final prices between $2,900 and $3,200 per m2 in the most sought-after urban corridors of the region.

This nominal escalation in pesos, combined with the relative stability of the exchange rate and a general disinflation process, has accelerated a significant increase in activity measured in hard currency. The growing price gap compared to the used market raises a series of questions about the evolution of investments, the viability of new launches, and the sustainability of private profitability.

In the year-on-year measurement, according to the Association of Small and Medium Enterprises of Construction in the Province of Buenos Aires (Apymeco), the cost of construction reflects an increase of 25.69%, while the consumer price index rises to 33.5%.

The latest movement in the cost structure responded to the adjustment of salary scales. Labor recorded an increase of 7.65% in just one month to compensate for previous discrepancies. However, the accumulated behavior of construction shows a deceleration dynamic compared to the general indices of the economy. The annual variation in cost adds up to 13.05% against an inflation rate of 16.8%.

Nicolas Marín, head of the Association of Small and Medium Enterprises of Construction in the Province of Buenos Aires (Apymeco), explained the reasons behind the evolution of the spreadsheets: "The cost of construction in dollars may continue to grow during the second half of the year, although in a much more moderate manner compared to the dynamics of recent months. Measured in constant hard currency, it does not present a particularly high value, but rather hovers around its historical averages. Materials will increase at the pace of devaluation and will remain below the CPI due to weak demand."

The significant increase in construction costs has not completely halted the planning of new projects. On the contrary, during the first half of the year, there was a greater purchase of land and an increase in the submission of plans for future works, a sign that developers interpret as a medium-term bet.

Those with liquidity prefer to position themselves now in strategic locations rather than wait for a scenario of greater competition for land.

Martín Flachsland, marketing manager at Estudio Kohon, stated that the cost of construction already exceeds $1,600 per m2, not considering the impact of land, although he noted that the market is beginning to absorb those values. He explained: "At first, the impact on profitability exists, but as the works progress and new prices emerge, the market validates them. They even end up being positioned above used properties and finished products, whose average cost still remains below those levels.",summary":"The value of construction breaks historical records. With labor as the driving force behind the adjustment, developers fine-tune costs and seek predictability.

For the executive, the most complex stage of cost adjustment is starting to fade. "We are seeing the final ripples of the economic correction. The scenario points to greater stability, which generates a very optimistic outlook for the medium term," he stated.

Flachsland highlighted that the strong movement in land purchases and the increase in project submissions during the first half of the year reflect that developers continue to bet on the business. In his view, the deceleration of inflation and the emergence of tools aimed at channeling investments into the sector could accelerate this trend.

"Today, entering a project at the foundation stage may seem expensive, but when the work is completed, that value often transforms into an opportunity. Real estate investment continues to show the capacity to preserve value in the long term," he asserted.

Contained Costs, but Activity Still Not Taking Off
Although the cost per square meter has reached a new high in pesos and has also increased in dollars, for much of the sector, the main problem is no longer how much it costs to build, but rather the lack of demand.

Marín considered that construction costs in dollars could still rise during the second half of the year, although at a much slower pace than in the first half. He explained: "Today, the cost measured in constant dollars is close to its historical averages. If wages grow above the exchange rate, construction costs in dollars could continue to rise."

Source: Association of SMEs in Construction of the Province of Buenos Aires (Apymeco)

Regarding materials, he noted that the dynamics will be different. "We believe they will continue to rise at the pace of devaluation and will continue to grow below inflation, as has happened in recent months, because demand remains very weak and that limits any possibility of applying significant increases," he stated.

Marín recalled that the jump recorded in June was mainly due to the adjustment of labor costs and considered it an exception within a more moderate trend. "Exchange rate stability, the opening of imports, and low demand are currently the main factors containing construction costs. Additionally, the distortion of relative prices of materials that occurred at the end of 2023 has already been corrected," he indicated.

However, he warned that the discussion about the cost per square meter loses relevance in the face of the real challenge facing the activity. "Construction needs to grow again, and for that, conditions that are still not present today are needed," he summarized.

Credit, Public Works, and Income: Keys to Recovery
The president of Apymeco explained that the sustained recovery of the sector will depend on several factors: the reactivation of national, provincial, and municipal public works, the expansion of mortgage credit and for developers, as well as an improvement in income and confidence to mobilize private savings.

Marín stated: "In Argentina, mortgage credit represents only 1% of the Gross Domestic Product, while in other countries in the region it exceeds 10%. Without a financial system to support demand, home purchases depend almost exclusively on families' prior savings, which greatly limits the sector's growth."

He also considered it crucial for savings to be redirected towards productive investments and to recover purchasing power: "The indicator that measures how many salaries are needed to buy a home has worsened by about 25% compared to 2017. As long as incomes remain lagging, it will be difficult to expand genuine housing demand."

A more selective and professional market

From Gewin Desarrollos, they observe that the increase in costs has forced a change in the way each project is analyzed, although they rule out a scenario of widespread paralysis. Ignacio Carpinelli, a partner at the developer, explained that the rise in construction costs in dollars pressures profitability because selling prices do not evolve at the same speed. "The challenge is no longer just how much it costs to build, but how much the buyer can pay. The market has a limit, and it is no longer enough to automatically transfer all increases to the final price," he pointed out.

Source: Association of Small and Medium Enterprises of the Construction of the Province of Buenos Aires (Apymeco)

In this scenario, Carpinelli explained that developers have adopted a more conservative stance: "Today it is essential to analyze the impact of the land, location, product, and financial structure before launching a project. Opportunities exist, but they require much more precise planning."

He clarified that he does not see a widespread paralysis, although there are developments that are rescheduling stages or postponing launches to strengthen their financial scheme.

"Projects with good pre-sales, own capital, and land acquired at reasonable prices maintain their pace. In contrast, those that depend on accelerated sales or were designed with very tight margins face greater difficulties," he stated.

He also highlighted that many companies are reviewing types, surfaces, finishes, and financing schemes to adapt to a more demanding and selective buyer.

Long-term financing to change the scale

The consulted experts agreed that the sustained growth of construction will depend less on a specific drop in costs and much more on the consolidation of a long-term financing system.

Building costs will stop rising at some point. For now, it's an unknown

Carpinelli stated that tools such as the securitization of mortgage portfolios, new vehicles for funding real estate developments, and greater participation in the capital markets could significantly expand the credit supply.

He also considered that potential mechanisms for the externalization of capital specifically aimed at the sector could provide additional liquidity, always under clear rules and with adequate controls.

"Construction mobilizes employment, investment, and activity in dozens of industries. But it needs financed demand to grow sustainably. Without mortgage credit for the end buyer, it will be very difficult for the sector to reach a scale much higher than the current one. Economic predictability, long-term financing, and stable rules will be the variables that define the next stage of the market," concluded Carpinelli.

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