“Why would prices double in five years?” Yale professor Robert Shiller said at an event in Campos do Jordao, Brazil, on Aug. 31. “What could account for that other than excitement? The prices go up every month. They always go up.”

“There’s always a way to argue for any price increase,” Shiller said. “People like to think that this is a stable and steady increase. I was saying things about the U.S. just like this in 2005 and I got angry responses. I had people tell me you could be changing the psychology by saying these things. Some people think it’s like shouting fire in a crowded theater — you shouldn’t do that because it could create a panic. I felt maybe I shouldn’t be doing it. But on the other side of it, I’m thinking, you have to warn people at least.”

A warning from US economist Robert Shiller about the recent sharp rise in Brazilian house prices has revived fears of a property bubble in Latin America’s largest economy. According to London-based Capital Economics, “our position remains that, while there are several reasons why we would have expected prices to have risen in recent years, the sheer scale of the increase is difficult to justify. The market may be overvalued by as much as 50%.”

Capital Economics (and also this website) has first warned about the possibility of a bubble in Brazilian housing 18 months ago. Since then prices have continued to climb. In Rio they have more than tripled since 2008. Sao Paulo has not lagged far behind.

Here is their rationale for why current prices are not justifyiable:

“First, prices have risen far faster than incomes – whereas GDP per capita has risen by 50% since 2008, average house prices in Sao Paulo Rio have nearly tripled.

Second, although the spread of mortgages would justify a rise in prices, other emerging markets have seen similar (or even larger) increases in mortgage lending to Brazil in recent years, but house price gains have been far more modest. (See Chart)

Finally, house prices seem expensive relative to rents. According to the website Global Property Guide, the average rental yield in nine countries in Latin America is currently about 7.5%. In Brazil, it is 6%.

Based on a range of indicators our best guess is that Brazilian property is overvalued by around 30-50%. Looking ahead, there are good reasons to think that the macroeconomic fallout from Brazil’s property bubble may be less severe than for the US in 2008. But at the very least it another reason to expect consumer spending to slow over the coming years.”

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