Let’s start here with an analysis of the total credit to the Brazilian housing sector (see below). The housing sector credit in Brazil refers to the credit granted for the acquisition of residential properties (like home mortgages in the US).

By looking at the graph above, one can conclude that the strong credit growth (in absolute numbers) in Brazil started in 2005. Everything ok there, right?

However, consider this next chart showing the annual growth rate of credit to the housing sector.

According to Leandro Roque, the chart above paints a far more interesting story. In addition to confirming that the expansion of real estate credit started to inflate in 2005, it shows that the acceleration trend has stalled in early 2011, followed by a deceleration in the second half of that year.

According to the Austrian school of economics, the Brazilian real estate industry started its stagnation phase in early 2011. After all, this school of thought says that it’s not necessary to have a credit contraction (which is far from happening in Brazil given that it continues to grow over 40% per year) to deflate a bubble, as long as the credit growth rate decelerates (which is exactly what is happening). Housing credit growth fell from 54% to 40%. It is worth noting that, until now, there had never been any contraction since 2003.

When direct credit (“credito direcionado”) to properties stopped accelerating, the basis for the continuous rise in prices were removed. The reduction in this credit expansion has meant a slowdown in demand for real estate, because a major component of the demand for housing lies within the funds generated by credit expansion. A decline in this component generated an equivalent decline in the general demand for real estate. The decline in demand for real estate was obviously followed by a decline in real estate prices.

Property prices have fallen, but this is a fact that is being very cleverly hidden by the Brazilian media and home builders. For example, instead of stating that they are no longer able to sell for those former high prices, builders prefer to say that they are “doing deals” or “offering discounts and promotions.” But remember, there are no discounts on a genuinely hot market. There is only price drop, period.

When the sector credit was flowing rapidly, starting in 2008 and consolidated in 2010, several builders cheered with the prospect of easy money, hence they borrowed and launched projects. Now, however, with the slowdown in credit for the purchase of real estate, such earnings prospects are no longer being met, and several construction companies are facing difficulties in their balance sheets. Just look at the share prices of the main real estate companies listed on Bovespa (Rossi Residencial, PDG Realty, Brookfield and Gafisa) – they are near their historical minimum.

Source: Ludwig Von Mises

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36 Responses to Brazilian Charts: Housing credit deceleration points to a bursting bubble

  1. Wolfgang says:

    The graph shows that growth has decreased but the growth is still very high, 40%. It is at the level of end of 2009. F.e. I tried to negotiate a discount for a launch (2017) in Rio, Recreio, but failed. Offer being at 6000 R$/sqm. I believe that’s too expensive given the return on investment by rental which is about 25 R$/sqm/month. I am sure rent wont increase in proportion to property ‘values’ – that’s my bubble indicator: sales prices increse much more than rental prices. That is not sustainable, even more since salaries do not increase by that rate neither.

  2. Jenny says:

    So that’s your game Wolfy. You want it to crash so you can buy cheap.
    Just another crafty German, I suppose.
    I hope it crashes in Germany first.

  3. Rodrigo Rodrigues says:

    ” Wolfy ” as you respectfully call him is not commiting a crime by buying cheap, I have bad news for you ,The German economy won’t crash,simply because they have fiscal responsability
    ,The German model of capitalism looks very different from that of the United States. In Germany, many companies continue to be privately owned, eliminating the need to appease shareholders. While financing in the U.S. comes from capital markets, local banks finance the smaller facility operations that comprise most manufacturing in Germany,But the main difference is the focus on workers. Large firms in Germany are required by law to have equal representation on their boards for both management and labor. This requirement ensures that workers’ rights and jobs will be protected when decisions are made about where and what to produce. It does not mean that jobs will never be offshored, but it does ensure that good jobs stay in the country when they will be beneficial to the company and the workers long term, and jobs are not moved for short-term gains.
    Additionally, when recession did strike, Germany didn’t misdirect its bailout at the top of large corporations. Instead, it provided a wage subsidy for certain workers to keep them employed, stimulate the economy and ensure its labor force remained skilled,Certainly the German model isn’t perfect, and it is based on longstanding laws and traditions that would make it very difficult to implement in the United States.

  4. curious says:

    The seller should be happy for someone who buys … even if he is German (like me too). Cash is king at the moment. Prices are not crashing, but lowering to a reasonable price for the offered space / quality / architecture / surrounding / traffic / cost of living.

    What I experienced :
    I am currently bidding for rent on a apartment in one Condo in SP …
    All apartments are new and are not habited since October / November … last year. The region is more or less, middleclass, not Zona Sul, the building is perfect. All aptos abt. 70 sqm. About 50 – 60 apartments in the condo. 8 are for sale officially. Some for rent already.
    All the same size, etc. :
    A : 3.200 BRL
    B : 2.700 BRL
    C : 2.600 BRL
    D/E : closed at 2.500 BRL.
    [side joke : B says that he would not lower, as others ask for more. Great. ]

    Talking to A , a rich lady with abt. 10 investment apartments , not ready to lower as she holds the cash and has no pressure. But seeing B/C/D/E… they are with pressure to get it for rent in order to pay the bank. They did not suceed to sell in one year. The market is still ok, but not at all as 2 years ago when renting in SP meant bagging for getting a space.

  5. Lidia says:

    Yes, but you are forgetting that the markets are rigged. Brazil’s real estate is by far too expensive, but it keeps going up.
    Why?

    Look at their hotel fees, a ripoff.

  6. Thomas B. says:

    @curious, 2,500 BRL(as the final price) to 3,200 BRL(this is just the asked price, not the final) is a 28% difference, not an amazing deal, in my opinion.
    Usually when you are advertising your apartment, you´ll ask for at least 10-20% above the market value, its not like in the US, where the price is almost unnegotiable (at least for condos, super-fast rental system, “fill up the application, pay the deposit and get the keys”, I really don´t know in Europe and elsewhere).
    In Brazil, it goes back and forth, several offers and counteroffers, with a lot of real estate agents “secret schemes” in the middle(“he´s going to rent the other one, close the deal now!” and let me get my commission…), there is no deal without some struggle and bureaucracy, even if the market is burning hot.
    I believe there is no way to really know whats the owner financial situation, pure guess or real estate agent scheme talk(“Look, everybody is asking for more, this one is an awesome deal, one in a lifetime, you are a very lucky man!”).
    Looking at those prices, I believe this condo is far away from any “classic” business area(minimum four hour commute to these areas everyday) , maybe Tucuruvi area(maybe Zona Leste?), its still really expensive, you must know that if its 2,500 BRL there( plus a 300 to 500 BRL maintenance fee), it would make a place near Faria Lima cost at least 4,500 BRL (for a brand new one like yours, plus a 500 to 1,000 BRL maintenance fee).
    You could easily rent an amazing condo in California or Dubai with that money, and the income per capita in those place is a “little bit” higher than in São Paulo.
    p.s.: I don´t think there are way too many empty units in São Paulo, even if the real estate prices go down, rent will still be a problem, just my opinion.

  7. McIvor says:

    It will continue its exponential climb until it reaches unsustainable levels I think we are very near). Then it will morph into a steep descent. Sounds familiar?
    The event that will trigger: who knows?

  8. Wolfgang says:

    Jenny, :) you are funny. Nobody hinders you to buy overprized property if you believe that’s what Brazil needs to run its economy … kkk
    In Germany, I believe one of the main factors of success is: many smaller companies, a few huge ones only. The smaller ones are more flexible and innovative contrary to popular believe that only huge global players could be innovative. Then, a second point: still a very high quality dedication of the workers. Look, they are proud to build that Mercedes or BMW and they do their best. Still a high level of expertise, is another point. Very high productivity.
    I am not saying that others dont have these points as well. But it might be the combination of all these that makes Germany currently (!) look bright. Italy f.e., their strong point is the incredible creativity of the people (moda, desegno, think “Ferrari”, Pininfarina, other high tech). But it lacks dedication on the base worker level, flexibility… and a lot more. I am living in Brazil, Jenny & Rodrigo. So, I might not be the typical german. Especially in that that I am not so stupid to buy any overprized crap here. Sorry and forgive me!
    Ah, and one more point: Who falls first might stand up first as well… – anyway, it seems we’ll fall altogether, more or less.

  9. gringo says:

    B/C/D/E are going to come begging for you to rent soon. I can see the bubbles already.

  10. gringo nao sabe nada says:

    It seems to me that we are missing a bit of historical perspective on the bubble. I think Rodrigo’s comments here and in other posts are really good. I even copied and saved for myself his comments on RE agents in general. Nevertheless, for anyone that lived in Brazil starting say in the 50′s through 80′s should recognize the major qualitative and quantitative changes. The growth in wealth at all levels has been really astounding since the monetary stabilization. While RE prices may certainly be inflated, I do not see the wild fluctuations returning because the economy now is much more predictable and there is more and better information that is readily accessible. BB is an example of this. Properties that I owned prior to stabilization fluctuated wildly in cruzeiros, novo cruzeiros, cruzados and cruzeiros again but varied very little in dollar terms. Today those same properties are worth 100 to 300 percent their original dollar value and will not even, in the worse case scenario, drop to their original purchase. Of course, there are no guarantees but I don’t see property values declining that much in say Ipanema, Leblon…..these places are built out and have high demand. Barra is more risky. In SP, the same as Leblon can be said for the region from Chacaras/Jardins to Altos dos Pinheiros and beyond.

    If you negotiate well and buy to hold rather than flip, you will probably be OK, maybe not make a ton of money but OK.

  11. Ben says:

    Germany is finished, game over, kaput.
    It will soon be taken over by Turks. Just ask any German that lives in Germany what’s really happening there.
    Soon they be begging S. American Countries to take them in.

  12. Ben says:

    Personally, I think the value of Real Estate in Rio is way overpriced.
    In the old days with the devaluation of the Brazilian currency prices were always the same in U$, even though inflation was very high.

    Unfortunately Brazil can no longer devalue its currency like they used to do and inflation is still out of control.

    A totally pathetic situation, I just hope it’s soft landing so Wolfy can take his ass there for a Holiday.

  13. Thomas B. says:

    I’ve made a mistake, 3,200 minus 22% = 2,500 BRL, so its even lower than the 28% I wrote.
    New real estate is way too expensive and not their location is usually far away from good areas. My friend told me that you could easily find cheaper prices for bigger units in Perdizes/Pompeia, in beautiful streets, near shops, Paulista avenue and subway stations. The difference is that these units are older, I wouldn’t mind, its even kind of cool to live in classic apartments.

  14. REPX says:

    “Austrian School of Economics”? Are they experts in Brazil? Never heard of this school, but anyway, let me get to my point:

    Credit deceleration suggested on the article will not BURST a bubble (if it ever exists). It will prevent the “bubble” from getting bigger and bigger. To see a sharp decline in RE prices – aka a burst – a major event must occur.

    I have been actively seeking an apartment to buy and live in it (i’m not an investor). And prices are dropping, at least for used apartments in Sao Paulo’s south region. By dropping, I am talking about 5-10% decrease; a burst would be on the 30-40% range, in my opinion.

    The media is not hiding this price drop b/c there is not actual price index in Brazil! Reporters write whatever FIPE-ZAP says on their monthly report, ignoring the fact that FIPE-ZAP shows ASK prices only and most of the times owners do not update their prices on the website when they reduce their prices (as a significant proportion of the ads are uploaded by brokers).

    Bearishes, stop the mimimi, work harder and go to the RE market. Unfortunately (I haven’t bought mine yet) the “bubble” will not burst and currently there are some forced sellers.

  15. Rodrigo says:

    You are an idiot REPX if you don’t know where Austria is, just think of Kangaroos and Koalas.
    As for you Ben, I think you have hit the nail right on the head, Wolfgang’s head that is.

  16. Rodrigo says:

    Why don’t you buy in the slums Wolfgang whilst you can still afford to.
    Don’t come complaining here after if the Slum prices become too expensive for you.

  17. Jim says:

    Soon the Euro will crash. Soon after the Euro, the U.S. dollar will crash. Soon after that the Brasilian economy will take a steep dive, along with the Real Estate market.

    Don’t ever believe it can’t happen in Brasil. I have seen it happen in Florida, USA. I have seen prime Coastal properties drop by 95% in five to six years! Real Estate that previously sold for $1,000,000.00 (1 Million) in 2005, you can now buy for $50,000.00! Believe it can, and will happen in Brasil! If you own Brasilian Real Estate, sell it now! I repeat, sell all your Brasilian Real Estate NOW!

    Then, wait a few years and buy at a steep discount compared to today’s prices!

    When the Real Estate market was booming in the US, most real estate investors also said prices would never drop . . . buy, buy, buy!

    Now, many people who were once multimillionaires, are now worth far less than nothing!

  18. Wolfgang says:

    @Ben, which ass are you talking about? ;)
    I agree with REPX – still there is no sign of a bursting bubble. There is just some deacceleration and in a few areas even moderately falling prices, very few areas. Best advice for those who want to buy (me too): Wait in US$.
    Because even in case we should have a continued price increase of, say, 10% per year, chances are that the Real will fall more than 10% against USD in the coming weeks. Target short term: 2,20 R$/US$.

    BTW, nice german bashing here. I take this as a complement. The mediocrity always hates the outstanding.

  19. John says:

    Wolfgang, what’s it like having a nail hammered into your head, has it knocked any sense in you yet?

  20. alexny says:

    “BTW, nice german bashing here. I take this as a complement. The mediocrity always hates the outstanding”

    Agreed..

    Wolfgang, brazilians have been brainwashed for a decade , They look around and all they see is favelas and crime , no industry , no tecnology ,worst universities in the planet .
    Salaries are ridiculous , but everything costs a lot more then any developed country.
    But… TV keeps telling them ,”We are the best!!!!”

    They are about to have a huge awakening

  21. Mertens says:

    Wolfgang is waiting in Euro not safer?

  22. REPX says:

    Rodrigo, thank you for your polite compliments. Please re-read my comment and you will realise I never questioned where Austria is; I just questioned Austrian School of Economic’s expertise in Brazilian Real Estate. Perhaps the idiot here is not me (or it could be, if they are an expert).

    Jim provides a plausible argument. The crash of Euro + US fiscal deficit deepens will indeed move prices of several assets, however I am not sure whether it will burst (40+% drop) RE prices in Brazil. My uncertainty is based on the fact that the vast majority of home buyers are/were buying RE to live in it; therefore they will not be forced sellers directly hit by a liquidity contraction. They MIGHT become forced sellers if they loose their jobs. Investors will dump properties, but again, they are a minority among RE trades.

    The liquidity contraction will directly impact new mortgages, so forced sellers will be in big trouble. But those that are living in the property with no NEED to sell should not dump their properties…

    Moreover, Brazilians usually see a RE as an asset that protects them from inflation and crisis. So should these major economic events occur, people will stick to their asset.

    (but this a very high level analysis out of my mind. The Euro collapse + US default will certainly bring unimaginable consequences. And should these events happen, can anyone guarantee that you will have cash and/or financing to buy RE for more reasonable prices?)

    Wolfgang, I wish BRL would devaluate, but CB is acting so severely that I don’t see that happening (IPCA is already about 5.5%) on the short term.

  23. Joe says:

    truth is there won’t be no bubble burstin… there’s way too many people with money and a lot of investor trying to get something in Brazil… the market should slow down but nothing like bubbles bursting… the government will hide that pretty well if it happens… like everything, they will hide the truth and nobody will complain.
    I surely would like it to pop though… and then maybe i could buy something there. Right now, i won’t buy anything because prices are just not worth it… violence, misery, etc… wont be solved in one day or anytime soon… pay 500k in an apartment in Rio or a condo in any beach in the northeast and have crackheads shooting you for your cell phone! just not worth it.

  24. johnberk says:

    I can see many similarities to the slowing Canadian market. It was the same story here. Too greedy and profit driven companies launched condo building in Toronto and now we have an insane amount of empty condo apartments. The curious thing about is that it still maintains the same price, even with slow increases over the time. The developers are artificially keeping the price on the same amount, hoping that they would sell it sooner or later all. But it is not possible, because of the demographics (which is not a problem in Brasil) and because of the household debt (which we have in common). With all the problems Brazilian economy has lately, I´m scared that your bubble will burst sooner and with bigger consequences.

  25. Tarik says:

    Guys, this suppose to be a discussion about RE, not a piss tournament.
    Yes, Germany is outstanding and have a work culture only rivaled by Japan. Nevertheless, many people have emmigrated to Brazil, seeking a better life. Many found it.

    Brazilians may be brainwashed and things are really expensive now. But, as someone pointed out, is impossible to not see the improvements of the last 30 years. That is why there is a forum about it in the first place. There are many expats moving or trying to move to Brazil. Also, bear in mind, Brazil is not only Sao Paulo and Rio de Janeiro. I still can live a better life for a better price than in most parts of the world. Although I would trade Rio de Janeiro for Cape Town if my work would allow it. But I would trade for Florianopolis also.

    Opportunities still abound in the country, whether media or IMF, or the Central Banks say the GDP is growing or not.
    Funny thing is, as far as I remember, even during crisis times, there were always opportunities in Brazil. It is not like in other parts that when the crisis hit, the well dries.

    Brazil is an opulent mother.

    I also believe prices will get lower, but I have to live somewhere untill that happens.

    One piece of advise though. I may be wrong, but I don’t see prices skyfalling like in Florida. Brazilians have a different relationship with their real estate than people in USA. The prices may correct 5-10% in any year and if they are still high, it is more likely the inflation will bring them to terms rather than an owner sell for a big loss. They will be more prone to let time and inflation correct the price but still have the illusion they sold for a profit.

    Big Corporations, like Gafisa, Rossi, etc., are a different animal, so, in these new units, a bigger correction may take place.

  26. Hugo Chavez says:

    My people of the earth, the poor, the oppressed, the leaders of the unions, we must rise up and crush all of the rich Brazilian capitalists. The rich build high walls, but we will climb their walls like spiders, and take over their homes and condos. They fear us because of the high walls and bars over the windows, but we will take the rich to task. It is immoral to make such money off the back of hard working people. When Jesus worked in the slums, bringing bread to the poor, did he ask for all of the money so he could live like a king. No! We will take over the rich, just like Obama will kick all of the rich out and drain all of their money out of their rich veins of blood. Not even a stone wall can keep what is meant to happen! The bubble of the rich will pop, and we will take over their mansions, condos. They will not be able to keep us out. Amen

  27. Fred says:

    Actually, the fallacy here is to equate credit deceleration with a negative shift in demand – which is what you need if you want to extrapolate a crash from deceleration in credit. As it is, Brazil is undersupplied nationally and oversupplied in the higher end segments. The point is this: stay away from the high end (and perhaps upper middle) but the bottom and middle segments should actually accelerate now that prices have cooled, because demand remains very strong.

  28. L says:

    alexny:
    i totally agree!
    They have overcome UK for the 6th biggest PIB.
    Have you seen the size of the bloody island compared to Brazil´s territory. lol
    Prices are out of control!!!
    beware of the future: in the eye of the tornado you still can see the blue sky!

  29. farshad says:

    I just got back from north eastern Brazil. I sold an apartment that I bought in 2006 or 5.5 years ago. In 2006 I paid 230000 R$ (60 000 £), at the end of december 2012 I sold the same apartment for 750 000 R$ (about 230 000 £), i.e. four times the price I paid 5.5 years ago. If this is not a bubble I don’t know what is.

    The entire north east is a big construction site. Most of the people I know (all Brazilians) are buying with the perspective of making a quick buck.

    Easy access to credit is the reason for the price increases not a fundamental change in economy. Anybody remembers US, 100% mortgages. Well in Brazil it is even better than that, one can get more than 100% since Caixa lends for the tax and Cartorio costs as well.

    More than 90% of the mortgages are given by the two governement banks, Caixa and Banco do Brazil. It looks like the government is pumping money in the construction industry in order to show a nominal economic growth.

    I believe that aside from the expansion in construction industry, the rest of the economy is in recession.

    In my years I have learned that what goes up like racket, comes down like a rocket as well. Even so hope that the real estate market does not crash, because if it does the bill will go to the governement, since Caixa and Banco do Brasil are financing most of these mortgages.

  30. Hugo says:

    Just found this website today!
    I’m glad to know more people suspect the same thing.
    If even “gringos” think real state market is overpriced, we’ve got a problem.

    I guess it’s gonna be another 1-2 years until people realize they can’t really sell those apartments they bought as an investment for a higher price or until they run out of cash to pay the mortgage.

  31. RPRP says:

    You guys have no idea how many people here in Rio bought RE to try to resell it in the short term.

    You also would be surprise of how many of them are stuck not being able to sell it and paying the for the loan.

    In some neighborhoods like Barra da Tijuca, famous beach in Rio, rent and sell signs are everywhere.

    If a bubble is going to suddenly burst I don’t know, but for sure a lot of people that wanted easy money are going to get screwed.

  32. Brazilian Bubble says:

    We’re not surprised, Rafael.

  33. salvador says:

    A bubble in tech terms means the RE prices are no longer sustainable to buyers not investors. Buyers are workers who can be fired and thus missing the mortgage payments. A bubble will come at the end of the Soccer Cup, just as it happens after the end of the olympic games in Canada and in Spain. Everything else adds nothing to the formula and will not change the outcome. Brasil has a RE index but it only works for some states and in some cities and they are done by professional evaluators like myself. We advise the banks and not private investors but that does not mean the index cannot appear on newspapers. The only reason the index for SP and RJ does not appear in the media is because there’s no independent media in Brasil. As you may not know, Brasil ranks at the 99 position in the world press freedom index of 2012, right next to countries like Gabon and Guatemala. (sorry for my poor english, I am better in math).

  34. Pedro says:

    In Rio I believe at least part of the culprit in the real estate speculative boom most certainly have something to do with the rental of apartments for short stay.
    Yes, people have always been doing this is the Zona Sul of Rio, but after AirBnB and their copycat website made it easy… it seems like everyone is doing it now.
    So, The Advent of AirBnB and their copycat website + Olympic/Copa fever + a hotel shortage has created a real estate speculation boom.
    Why rent to locals when you can get three times as much renting to tourists who pay in advance and you know are not going to stay in the apartment forever?
    Then the money you earned from that and buy another apt.
    Furnish, rent and repeat.

  35. Pedro says:

    …cont…
    It’s at least one reason why cities like Paris and New York has made the rentals of short term furnished apts illegal.
    Short term rentals encourage real estate speculation.

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