(An excerpt from an article recently written by Valor Economico’s Fernando Torres).

The balance of real-estate loans in Brazil, according to data from the Central Bank (BC), represents 4.8% of GDP. This is a significantly lower ratio when compared to other countries. In the US the ratio is 81%, while in Mexico it’s 11%.

The low ratio in Brazil is constantly used as justification by companies and banks to deny the existence of a real-estate bubble in Brazil and prove how the country is still making its first steps in the market.

But those 4.8% reflect more the past than the present.

The BC’s data cover all real-estate credit for consumers. If the loan is R$150,000, that’s the amount that is booked by the bank as credit and the number included in the monetary authority’s statistics.

But if the loan is made to a developer, the balance accounts only for units effectively cleared, something that depends on how the works are progressing. This means a relevant share of loans already approved for developers is still not represented by BC’s data.

This difference in criteria helps explain why Itaú Unibanco and Bradesco manage to fulfill the requirement of having 65% of savings deposits invested in real-estate credit. Whoever studies both banks balance sheets will see the balance invested in housing loans is around 30% of assets from savings accounts.

The remaining 35% comes from approved loans – but not yet paid – for developers and also other investments considered by the BC as real-estate finance tools, like real-estate investment trusts and certificates of real-estate receivables.

With this more wide-ranging concept, real-estate credit now represents 8.3% of GDP. The ratio is still considered low internationally, but it’s bigger than the most widely-used index.

It’s worth noting that when developers transfer loans to buyers, financing value tends to increase in the BC’s statistics, since it also includes the developer’s margin. The expansion usually is around 30%.

There’s another factor that is likely to expand credit as a proportion of GDP. Balances for those loans are adjusted by contract interest rates, usually from 10% to 12% plus TR, while the projection for yearly growth in nominal GDP for the next years is around 9% a year.

So if no new loans are extended (something unlikely), housing credit’s share of GDP will expand at only the replacement rate before declining as loans are paid.

Source: Valor Economico

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