A recent article at Brasil Economico has caught our attention. While many analysts say that Brazil’s real estate bubble is not really a bubble because there is no speculation taking place, some other indicators (which don’t look like “speculation”) point to the contrary.

In recessionary times, traditionally, conservative investors flee the stock market and seek “safer” investments such as fixed-income securities. In Brazil, real estate-backed securities like CRIs (“Certificados de Recebiveis Imobiliarios”) and CCIs (“Cedulas de Credito Imobiliario”) have been growing like “bazookas” in the last four years. Just look at Cetip’s portfolio (below).

Since May 2008, Cetip’s R$16 billion real estate portfolio has grown to a whopping R$ 133.1 billion. In other words, in only four years the portfolios for these securities have grown by more than 8 times its original size. So, while many people are not “speculating” by buying and selling actual homes, they are investing their cash in “safe” fixed-income funds backed by (already expensive) real estate. Real estate fund managers in Brazil are marketing their portfolios as “safe because they are backed by fixed assets, the properties”. These securities also seem attractive to individual investors because they are exempt from income tax (which is always good in an environment of falling interest rates).

But watch out, investors: these funds’ performance lagged in 2011, and might get hammered in 2012 and 2013 if the bubble pops…

Source: Brasil Economico

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7 Responses to Chart: Here is why a potential real estate bust in Brazil may hurt fixed-income investors

  1. Fred says:

    Re your comment, “Since May 2008, Cetip’s R$16 billion real estate fund has grown to a whopping R$ 133.1 billion. In other words, in only four years the fund has grown by about 8 times its original size. And that is only one fund!

    just to clarify, Cetip (www.cetip.com.br)is not a fund manager, but a clearing house/ central depository, it compiles data on the industry. The data is not related to one single fund.

    Does not reduce the merit of highlighting the explosive growth of the real estate investment funds.

  2. Brazilian Bubble says:

    Fred, thanks for your update, i corrected the article appropriately.

  3. Dan says:

    This is exactly what happened here in the US with MBS (Mortgage Backed Securities). The sad part is that this will burst and these investors will lose part of their principal if they continue to be sold the idea that real estate prices never go down.

  4. Ryan Stewman says:

    Brazil is a booming country and I would imagine cant afford to go backwards. They recently found a ton of oil off their coast, you would think RE would be booming in a major way esp with immagrants.

  5. Dagoberto Godoy says:

    Besides, you should pay attention on another bubble which will possibily explode in Caixa’s hands. Caixa is financing millions of people od the so-called C class, just like it hapenned in US.

  6. Anderson says:

    Not really. LCIs, a type of MBS is insured by the govt (via FGC, FDIC equivalent) to up to 70k BRL for small investors, which is why most of my savings are on this. So if the loan goes bust, I won’t even care cause Dilma got my back ;)

  7. Lucas says:

    Yeah but it is very sad trying to argue that Brazil is near a US-like real state bust. We brazilians are way more f*ck up! And ironically that make our market safer! I believe this is a bubble real state market, the prices are way too high but living standards here in Brazil are a JOKE. For instance (and I know this because my girlfriend is current looking for a condo) if you take Caixa´s example (goverment backed and subsidized financing):
    - A minimum wage person: R$8.086,00 (US$4.043,00) annual income looking for a 80K BRL house= 46,47% mininum down payment; just under 6% interest+about 5% inflation adjustment (annual for both); can only finance about 32,3% of total plus a 21,25% gov subsidy (witch is 17K BRL fixed for new homes and 5K BRL for used homes).
    - An average “class C” person: R$18.850,00 (US$9.425,00) looking for a average 50m² (538 Sq.Ft) 2 bedrooms home in my city, R$150K (US$75K)= 48,54% minumum down payment; same interest rates; can finance up to 40% of total and get a 11,4% gov subsidy.
    Both cases for a 25 years financing! The thing is that the banks here only lend if you can prove income and the lending is limited to 30% of monthly income.
    So the goverment is in the way driving prices up but fortunately they can not go on forever and the business will have their downturn but in a diffent manner than in the US.

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