Here we present the point of view of our friend and FGV’s Economics Professor Samy Dana about the housing bubble in Brazil, how real estate is not a good investment, and why the bubble will burst at some point:
“… Brazil is in fact experiencing a typical housing bubble. My conclusion is a fact because the value of a financial asset is its ability to generate future cash flows. If the rental yield is significantly lower than the bank savings yield, the asset must be overpriced. However, the irrational logic of a bubble is that although the asset is not worth what the sellers are asking for it, an individual still buys it with the hope that the property will be worth even more in the future, as it is believed that in the next day someone crazier than him will accept to pay an even more unrealistic price than what he paid today.
It is the irrationality and this detachment from reality that makes every bubble burst at some point. This should also occur in Brazil. And when this happens, many investors and speculators who bought houses with the hope of carrying out large capital gains will end with huge capital losses. And taking the issue further, a housing crisis could cause significant damage to the entire financial sector and the real economy, as occurred in the United States, which is still recovering, quite weakly, from falling home prices in 2007 and 2008.
The lesson that can be drawn from all this analysis is quite simple: the returns of the market are small, as evidenced by the data, and very risky, as you saw in the American case. Therefore, if you have some capital, do not invest in real estate.”