By Antonio Ateu.
Huge amounts of capital flowed from developed countries to the so-called emerging markets after the US real estate bubble popped, causing the build up of the 2008 crisis, the “Great Financial Crisis”. One big portion of this capital was used to buy commodities, another portion went into financial markets (public debt and stock market), and another huge chunk went into real estate.
The property market in major cities of Brazil saw absurd price increases in the last three years due to speculation that fed itself in a loop. Since the second half of 2011, coinciding with the deepening of the developed world crisis, the Brazilian construction industry reached an inflection point in which may have signaled the first signs of the bursting of the housing bubble. Large speculators withdrew their capital, the main homebuilders saw their cash flow being squeezed, and housing prices began to fall slightly, reversing the previous trend of explosive price increases.
The Bubble Chart
The sharp increase in default rates has led banks to increase their provisions to cover debt losses and slow their lending pace. According to Abecip (Brazilian Association of Real Estate Credit and Savings), this last May credit loans fell by 11% compared to the same month last year.
Brazilian homebuilder Cyrela, one of the biggest real estate firms in the country, saw its first half revenues fall by 5% over the same period last year.
Ratings agency Moody’s downgraded the major Brazilian banks by one to three notches due to their risk exposure to the credit and housing bubble. The Brazilian Central Bank’s opinion on this issue continues to be demagogic: “it was just a technical adjustment and does not indicate concern over the health of the banks.” According to the Central Bank’s director of monetary policy, Aldo Mendes, “it was simply a change in the measurement standards. Their downgrade does not reduce our confidence about these banks’ financial health,” he shrugged. But nothing is further from reality: the rising defaults are real and they threaten to pop the bubble.
According to Setubal, president of Brazilian banks Itau Unibanco, his bank will suffer losses of R$18 billion this year alone due to defaults, which rose to 6% so far this year (8% among individuals) and may reach 10% by December.
According to a FGV survey, 48.5% of Brazilian consumers have debt that compromise between 11% and 50% of their income. This situation has caused a slump in retail sales. According to Serasa Experian, retail activity contracted 0.2% in June and ended the first half of the year with an increase of 7.6%.