Written by E.C.

Pricing in Brazil can be a bit…surreal.

A Brazilian friend of mine recounted a classic example of this at the canteen of his Federal University. The menu included everyday snacks which included (i) a cheeseburger, (ii) an egg and cheeseburger and (iii) a fried egg as a side order.

The pricing of the menu was such that the egg and cheeseburger was more expensive than ordering a cheese burger and a fried egg separately. Therefore, the very logical reaction of students who wanted an egg and cheese burger for lunch, was to order the component parts as separate items and then assemble them at their tables immediately prior to consumption (they were studying Economics).

When the canteen’s management got wind of this, fearing a loss in profits, they prohibited the practice notifying the students that from then on the egg and cheese burger could only be purchased as a single unit. Canteen staff kept a watchful eye over side orders of fried eggs to make sure they were not placed in any burgers.

But this created all sorts of headaches as the students attempted to get around the ban by sending different people to buy different component parts. Inevitably, the policy provided enormous entertainment value for the students and was impossible to enforce for the canteen.

House prices in Brazil seem just as bonkers at the moment. They rose 165% in the city of Rio de Janeiro and 132% in the city of São Paulo between February 2008 and February 2012.

The main justification for this growth is the rise of the so-called Brazilian middle class and its increased spending power. The significant growth of this group is centered on what is known in Brazil as Classe C, i.e. households earning 3 to 5  minimum salaries (R$622) a month according to the Brazilian Institute for Geography and Statistics (IBGE). Household income in this group is therefore approximately US$ 12,129 and US$ 20,125 per year (13 monthly salaries at US$ 1 – $2).

But middle class in this case is a misnomer. In the United States, for example, this socio-economic group would at the bottom 25% of households and classify as low income.

It should also be stressed that Brazilian consumers face a considerably higher tax burden than Americans for example (on goods) and receive a lower level of public services – which often requires them to pay for everything from school buses, private education, healthcare out of their net salaries – placing further strain on household budgets.

The danger here is that the term `middle class´ is used to describe these consumers´ spending habits not their incomes.

So, how might low-income Brazilian consumers acquire middle class spending habits?

By assuming significant amounts of debt. In August 2012, for families earning up to 10 minimum salaries (R$ 6,200 a month – that´s Classe D, C and Classe B i.e. the vast majority of Brazilian households) 30.1% of income was spent on debt servicing. Closer inspection reveals that a hair-raising 18.2% of this demographic is spending more than half their monthly income to service debts.

Evidence would also suggest these consumers after years of easy credit may now have overextended themselves (below – in blue) i.e. 23.7% of this demographic reported debt repayments in arrears in August.

The continued rise in spending power of Classe C should not be overestimated nor should their ability to keep the Brazilian real estate bubble inflated, particularly in the event of any increase in interest rates.

This month a study by the Brazilian Applied Economics Institute (IPEA) stated the “concrete possibility that there is a real estate bubble in Brazil” which is likely to burst on any increase in interest rates.

This would not only put this ‘middle class’ under more financial stress but also means investors that had migrated from the long established Poupança savings account and into property portfolios may very well migrate back again.

And that would really burst the bubble.

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9 Responses to Brazil: Bonkers Burgernomics

  1. frank stein says:

    Bubbles will deflate or burst soon. Former president Lula is a lier and thief. Brazilian middle class defined by them is a sorry joke. In Brazil it is usual for the “middle class” to buy shoes in 4 to 10 monthly installments. Foreign investors are in for a shock.

  2. Patricia says:

    There´s no such thing as MIDDLE CLASS in Brazil….that cliche is a goverment SCAM. I ask always the same question myself….do you trusts a third world statistics bureau? Always get the same answer in my mind…NO I don´t. Brazil is overrated and overvalued … quality of brazilian products and services are poor and bad value for money.

  3. frank stein says:

    There is a minuscule middle class in Brazil. It comprises folks making about 20 000 reais a month. However, the standards of living are lower than somebody making US$ 10 k a month in the US because every product in Brazil is exhorbitantly priced. Services are cheaper in Brazil which contributes to general poverty.

  4. Wolfgang says:

    Sure, a lot is overrated. Nevertheless, people pay 1,000,000 USD for a 120sqm apartment in Leblon easily. And those are not brazilian middle class but upper class. And they buy for “investment” (as they name this), actually speculating in further increase until the olympic games in 2016. We will see how this turns out.
    Those who see a bubble bursting, if it’s not simply wishful thinking due to lack of money for buying the desired property, I wonder how they see rising interest rates?? Brazil banco central will not rise the interest rates probably until 2020. Why should they? They are still the highest of all top-10 economies! Quite to the contrary: BC will further reduce interest rates with shrinking growth and will accept rising inflation.
    I see prices of properties on a slow decline only for one reason: The average brazilian cant afford it anymore. But this will hit the cheaper properties, like up to 800 kBRL, the luxury properties are still rising.

  5. Josias says:

    Brazilian government is shit. They are trying to create a fake middle class by drowning people in debt. Unfortunately Brazilians are dumb enough to believe this is possible. Instead of getting some education, most people are buying houses, cars, big televisions and a bunch of other things they cannot afford.
    Just vist any favela and you’ll see that everybody has fancy cars and expensive clothes, and the best thing is – they don’t pay taxes!
    All system is broken despite all efforts to tackle corruption because Brazilians, in nature, are corrupt. Just grab any History book and see for yourself the big loop they are trapped inside.

  6. Helena says:

    I am Brazilian. And I am old enough and educated more than enough to know about my country’s History, Economy and politics.

    It is so annoying to see all these people who do not have a clue about what Brazil truly is, spreading nonsense through ridiculous articles like this. The blind leading the blind trying to convince someone-who?? (the poorly informed, for sure) that they have drew the final theory about Brazil and the truth behind our economic growth.

    I am so sorry for you all: the ones who write , who trully look pathetic on the eyes of the people who understand Brazil. The ones who read and, on top of their ignorance, eat all the nonsense the first morons write.

    Hey! You can not browse a few websites and decide that you know all about Brazil. Unfortunatelly you will have to be more educated and, judging by your article, go back to scholl to be able to draft a humble opinion about my country. You (who wrote this article and (too) many out there, you know nothing!

  7. Helena says:

    And do not bring me the BS :” I ‘ve been living and doing business in Brazil for more than a decade…” because that, buddy, makes you look even dummIER!

  8. Anthony Rosenberg says:

    Please, Helena, instead of just throwing insults, present a valid argument. The article did, with facts and numbers. We eagerly await your valid input. Oh, and another thing, please be polite…. as a Brazilian, you more than any of us, know that politeness gets you much more respect than hurling abuse at people you do not know.

  9. innermoss says:

    personal observation: when i first moved to Brazil, one of the discoveries that surprised me was the extent to which ordinary household appliances were bought by installment credit – even a crappy Brazilian electric iron would be offered for purchase in 10 instalments. At first, I though it was bizarre then I realised that items like that were @big ticket@ purchases and it was acceptable for people to buy them with credit. The same principle extends upwards to most things. It doesn’t surprise me at all that there has been an overextension of credit or a bubble.

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