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Rentals: The risks of increasing prices due to inflation - La Nacion Propiedades
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January 15, 2024
Since Javier Milei's DNU came into force, rents can be adjusted for inflation; what you need to know before moving forward
By Mercedes Soriano
Rentals: landlords can now freely negotiate contracts with tenants
The DNU issued by President Javier Milei repealed the Rental Law and, with it, returned the rules of the game to zero. Among the various freedoms left at the discretion of the parties , is the possibility for the owner and tenant to agree on the form and frequency in which they wish to update the rental value.
One of the most tempting options for homeowners is to adjust prices with inflation numbers in mind. This would allow owners to stop losing profitability, a fact that could encourage them to put their apartments up for rent and thus generate an increase in the supply of units, a phenomenon that a few days after the DNU came into effect, already showed some signs of reaction. . “ Every day we have five calls to check the value and new conditions for renting ,” says Soledad Balayan, director of Maure Inmobiliaria.
While the Rental Law passed in 2020 was in force, the contracts had to be adjusted once a year based on the Rental Contract Index, better known as ICL and prepared by the Central Bank. This takes inflation and salary as a reference in equal parts, but is calculated with a two-month data lag. In other words, those who update, for example, the rent in January, do so based on the inflation and salary figures for November.
While the Rental Law passed in 2020 was in force, the contracts had to be adjusted once a year based on the Rental Contract Index, prepared by the Central Bank.
This mismatch, added to the fact that the contract “frozen” its value for 12 months because the adjustment was annual, caused a loss in the rate of return for the owners. “Over the three years, the owner earns nine months less than the total 36 months that the contract lasts . This means that he ends up giving up 24% less than the original amount,” quantifies Federico González Rouco , economist on the Empiria team, Hernán Lacunza 's consulting firm.
Although this freeze benefited the tenant and gave him predictability - since he knew how much he would have to pay for a year - it hurt the owner's business and he was disincentivized from allocating his property to the traditional rental market. For this reason, many migrated to temporary workers.
In this context and in the face of an unregulated market, a survey indicated how contracts are being negotiated: 57% of the almost 600 surveyed by Alianza Urbana , a civil association in which the community of real estate development professionals who carried out the report participates chose that the adjustment be for inflation, 16% for the value of the dollar and the remaining 13% for the ICL.
“We have our own knowledge that the majority of the income from rental contracts that an owner has is used to reinforce his salary. Therefore, having an index that follows the same level as inflation helps prevent it from slipping,” says Santiago Levrio, institutional director of Alianza Urbana.
The B side of the inflation adjustment
To adjust the rental price for inflation, the contract can establish as a reference the Consumer Price Index (CPI), which is published every mid-month by the INDEC.
When signing the contract, the parties must also define how often the inflation adjustment will be made, that is, the periodicity of the adjustment. “Due to high inflation, it is advisable that the indexation be quarterly. In normal times, indexing could be quarterly or semiannual,” advises Dr. Enrique Abatti, president of the Chamber of Owners of the Argentine Republic.
In this sense, the Alianza Urbana survey determined that 45% responded that they will do it every three months, 18% every month and 13% every four months.
To adjust the rental price for inflation, the contract may establish as a reference the Consumer Price Index, published in the middle of each month.
However, it is important to note that specialized sources in the sector warn about the decision to negotiate a quarterly and inflation adjustment. They affirm that in an economic context of recession, delinquencies could increase because the tenant could have difficulties paying the rent . “Perhaps at the beginning they can afford the committed spending, but if inflation grows 25.5% every month as it did in December, in one quarter the increase would be almost 100% and it is likely that the salary will not accompany this adjustment” , analyze the sources consulted.
How to Calculate Inflation Rent Increase with an Automatic Calculator
On the Internet there are multiple options for automatic accumulated inflation calculators that take the data published by Indec as a reference. One of them is Checked, which is the one that will be used as a reference in the following procedure:- Go to https://chequeado.com/inflacionacumulada/
- Where it says “To buy something that was going out” enter the rental amount that must be updated .
- Where it says “at the beginning of”, enter the month in which the period from which you want to adjust begins . For example, if at the beginning of January you wanted to make a quarterly update, the period from September to November should be considered.
- Where it says “at the end of”, enter the month in which the period from which you want to adjust ends.
- Where it says “you would need the sum of” the new rental value will appear.
Rents that are adjusted for inflation may use an automatic cumulative inflation calculator to calculate the updated figure
For example, if a quarterly adjustment was agreed, for a rent of $300,000 that must be adjusted in January 2024, the last index published by Indec is from November 2023. In this case, the three-month period from September to November will be used. Given that the accumulated inflation in that period was 37.68%, the amount to be paid would be $413,031 per month.
How to calculate rent increase due to inflation manually
In the event that you decide to adjust manually, it is important to highlight that the inflation of each of the months should not be added but rather the inflation variations of each month should be multiplied and multiplied between these and the rental value , given which is the accumulated inflation of the period.First, you have to know what the inflation was for the period for which you intend to adjust the rent. The steps to follow would be the following:
- Access the Indec CPI report, which can be accessed from the Indec website ( indec.gob.ar ), then go to the “Statistics” tab, click on “Prices” within the Economy section and then Select the “Consumer Prices (IPC)” button. It can also be accessed directly from this link .
- Click on the “read report” button.
- On the fourth page of the document, see the second graph “Monthly variations in the general level of the CPI”. There you can see the inflation for each month, with which the variation rate in the desired period will be calculated.
The inflation of each month should not be added, but rather the inflation variations of each month should be multiplied and multiplied between these and the rental value.
Once the data is located, the steps to create the account are as follows:
- First you must separately calculate the inflation value of each month divided by 100 and add 1 . For example, September inflation was 12.7% and dividing 100 gives 0.127, plus 1 gives 1.127. So on with each of the months that enter the update period.
- Then you have to multiply the current rental value by those individual inflation values.
- The result will be the new rental value to be paid for the next quarter.
- In other words, the formula would be: the value of the rent x (inflation first month/100 + 1) x (inflation second month/100 + 1) x (inflation third month/100 + 1) = updated value of the rent.
In a specific example , if a rental contract for $300,000 with a quarterly adjustment for inflation was signed on October 1, it should be adjusted for the first time in January. Given that the Indec report is released in the middle of the month, the data for September, October and November would be available on the first day of January, but not yet for December.
The value of the monthly variation of inflation in those months was 12.7% in September, that of October was 8.3% and that of November was 12.8%.
After dividing each by one hundred and adding one, the account would be: 300,000 x 1.127 x 1.083 x 1.128 = $413,031.
The formula would be: the value of the rent x (inflation first month/100 + 1) x (inflation second month/100 + 1) x (inflation third month/100 + 1) = updated value of the rent.
In practice, the tenant will be able to know half a month before the adjustment how much the rent will increase. This is because – using this example as a reference – in mid-December you can already know the inflation value for November and that way you could calculate how much you will have to pay in January.
However, the figure could change if the rent is paid at the end of the month because the percentage of rent from the previous month, in this example, December, would already be available. In that case, given that December inflation was 25.5%, the account would be: 300,000 x 1.083 x 1.128 x 1.255 = $459,941.
That is to say, by updating it in the middle of the month, in this case there would be an 11.35% difference in the new rental value.
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