A study conducted by two economists from IPEA (Institute of Applied Economics Research), a Brazilian government agency (believe it or not), suggests that there is “concrete evidence of the existence of a property bubble in Brazil,” which may burst with a potential rise in interest rates.

According to the authors Mario Jorge Mendonca and Adolfo Sachsida, the soaring prices of houses, land and apartments in recent years have resulted in unrealistic and unsustainable values. They estimate that prices between January 2008 and February  2012 rose by 165% in Rio de Janeiro and 132% in Sao Paulo, compared to an inflation rate of 25% in the period.

Here is how they define their study:

“This article verifies the occurrence of a real estate bubble in the Brazilian economy. Overall, our results suggest the existence of a bubble in the real estate sector of the economy. The Austrian School of economics provides a solid explanation to this phenomenon, which are reinforced by statistical techniques, suggesting the Federal government, with equivocate fiscal and monetary policy, as the main responsible for the creation of this problem.”

And here is their final conclusion (full study for download below):

“This study employed various methodologies at both the microeconomic as at the macroeconomic level to verify the possibility of a bubble in the Brazilian real estate market. Overall, the results point to the concrete existence of a bubble in the property market in Brazil. Objectively, our study provides a solid theoretical foundation to explain why the federal government, through its tax policies and credit stimulus, is the primarily responsible for the emergence of this bubble. The government’s insistence on further stimulating an already heated housing market will only make the outcome even worse.

It should also be noted that most mortgage contracts in Brazil are done with floating-rate interest. Furthermore, as results from the econometric study suggest the housing market is sensitive and responds negatively to increases in interest rates. In other words, increases in interest rates may bring significant problems to the housing market. As a matter of fact, this is precisely what caused the implosion of the U.S. housing bubble in 2007-2008.

It is clear that the current fiscal and monetary policies implemented by the Brazilian government are inflationary. Such policies will inevitably lead to inflation and to an increase in the cost of living in Brazil. Global interest rates are at record minimum levels, which means that, sooner or later, rates will rise. When this happens, Brazil will also be required to increase its domestic interest rate. Only then, the true costs associated with current tax and expansionary monetary policies implemented by the Brazilian government will appear.

Naturally, no one believes that a crisis in the Brazilian real estate market will have catastrophic effects, as was the case in the United States and in some European countries, because the supply of credit in Brazil is still quite restricted. However, the effect of the burst of the bubble will not be negligible. When the Brazilian government raise interest rates, there will be a direct effect on the real estate market. Then it will be Brazil’s turn to deal with a crisis created exclusively by the mismanagement of monetary and fiscal policies by the Brazilian government. It would not be the market that created the crisis, but the Brazilian government itself.

Finally, when such a disaster occur, the government will look for the guilty. It will blame everyone except its lack of fiscal and monetary responsibility. Brazil should have seized its good momentum in the global economy to make the necessary adjustments that the country needs. However, the time is passing and the opportunity is being wasted. When the crisis arise, the government will give a wrong response. It will very likely increase spending further, setting an even more expansionary fiscal policy, and facilitate credit further. And these measurements will make the crisis even more enduring and profound.

When several people are wrong for a long time and in significant magnitude, there is a price that needs to be paid. Government interference only prolongs and increases this cost. It does not fix the error, it only transfers the costs of the sector that made the mistake to the rest of the economy. The “bubble” in the Brazilian real estate market is being created and sustained by the government. When it “explodes,” the government will propose a fix, in the wrong way, to a crisis that it itself has created.”

Full study (in Portuguese), below.
ipea td_1762


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14 Responses to IPEA’s Economists: “Brazil’s property bubble will burst when interest rates rise” and “it’s all the government’s fault”

  1. Anderson says:

    And who told you (domestic) interest rates will rise? Govt’ rather have BRL devalued than rise the rate nowadays… They don’t want any more carry traders here.

  2. KB says:

    I respect a lot Mr Sachsida. Nevertheless I don’t put my faith on those models employed by the authors. I prefer my biological neural network.

    I remember very well the last two housing bubbles in Brazil. The first one in the second half of 70´s and the other just after the Cruzado Plan. In both bubbles I saw people eager to buy house to speculate, not to live in it. The same behavior I saw in the US in a very large scale. People camped out there not to lose the opportunity to purchase condos.

    Although I suspect housing is expensive in Brazil (I have my metrics) we should remember that prices remained almost frozen since the 80´s. Besides I still don’t see the same behavior I saw during the mentioned bubbles. Not yet, but I can be wrong because my survey sample is very small.

    On the other hand the cycle of Selic reduction is almost over and we could see a monetary tightening next year unless the global economy falls in a recession (probable). So we are in a situation of catch 22. In both case I see the end of upward cycle of the housing prices, although I don’t bet in a debacle.

  3. jayme says:


    ” Global interest rates are at record minimum levels, which means that, sooner or later, rates will rise.”

    that means, japan has been trading under 0.XX% for the past DECADE!!!
    US is going the same path..

    brazil is at 8.XX% , as they say here “we still got A LOT OF FAT TO BURN”

  4. jayme says:

    another add on: “bubble will burst when interest rate increases”

    my question: when will interest rate increases ?
    phd economist: “dont know..”


    this is like saying : “eventually you will die..”

  5. Rodrigo Rodrigues says:

    The only true sign of a bottom is a price low enough so that you 
    could rent out the house and make a profit. Then you’ll know it’s 
    pretty safe to buy for yourself because then rent could cover the 
    mortgage and ownership expenses if necessary, eliminating most of 
    your risk. The basic buying safety rule is to divide annual rent by the 
    purchase price for the house:

    annual rent / purchase price = 3% means do not buy, prices are too 
    annual rent / purchase price = 6% means borderline
    annual rent / purchase price = 9% means ok to buy, prices are 
    So for example, it’s borderline to pay $200,000 for a house that 
    would cost you $1,000 per month to rent. That’s $12,000 per year in 
    rent. If you buy it with a 6% mortgage, that’s $12,000 per year in 
    interest instead, so it works out about the same. Owners can pay 
    interest with pre-tax money, but that benefit gets wiped out by the 
    eternal debts of repairs and property tax, equalizing things. It is 
    foolish to pay $400,000 for that same house, because renting it 
    would cost only half as much per year, and renters are completely 
    safe from falling housing prices.
    Because it’s a terrible time to buy when interest rates are low, like 
    now. House prices rose as interest rates fell, and house prices will 
    fall if interest rates rise without a strong increase in jobs, because a 
    fixed monthly payment covers a smaller mortgage at a higher 
    interest rate. Since interest rates have nowhere to go but up, prices 
    have nowhere to go but down. The way to win the game is to have 
    cash on hand to buy outright at a low price when others cannot 
    borrow very much because of high interest rates. Then you get a 
    low price, and you get capital appreciation caused by future interest 
    rate declines. To buy an expensive house at a time of low interest 
    rates and high prices like now is a mistake.
    It is far better to pay a low price with a high interest rate than a high 
    price with a low interest rate, even if the mortgage payment is the 
    same either way.

    A low price lets you pay it all off instead of being a debt-slave for 
    the rest of your life.
    As interest rates fall, real estate prices generally rise.
    Your property taxes will be lower with a low purchase price.
    Paying a high price now may trap you “under water”, meaning you’ll 
    have a mortgage debt larger than the value of the house. Then you 
    will not be able to refinance because then you’ll have no equity, and 
    will not be able to sell without a loss. Even if you get a long-term 
    fixed rate mortgage, when rates inevitably go up the value of your 
    property will go down. Paying a low price minimizes your damage.
    Because buyers already borrowed too much money and cannot pay 
    it back. They spent it on houses that are now worth less than the 
    It is necessary that YOU be forced deeply into debt, and therefore 
    forced into slavery, for the banks to make a profit. If you pay a low 
    price for a house and manage to avoid debt, the banks lose control 
    over you. Unacceptable to them. It’s all a filthy battle for control over 
    your labor.
    This is why you will never hear the president or anyone else in 
    power say that we need lower house prices. They always talk about 
    “affordability” but what they always mean is debt-slavery.

    Because buyers used too much leverage. Leverage means using 
    debt to amplify gain. Most people forget that debt amplifies losses 
    as well. If a buyer puts 10% down and the house goes down 10%, 
    he has lost 100% of his money on paper. If he has to sell due to 
    job loss or a mortgage rate adjustment, he lost 100% in the real 
    The simple fact is that the renter – if willing and able to save his 
    money – can buy a house outright in half the time that a 
    conventional buyer can pay off a mortgage. Interest generally 
    accounts for more than half of the cost of a house. The saver/renter 
    not only pays no interest, he also gets interest on his savings, even 
    if just a little. Leveraged housing appreciation, usually presented as 
    the “secret” to wealth, cannot be counted on, and can just as easily 
    work against the buyer. In fact, that leverage is the danger that got 
    current buyers into trouble.

    The higher-end housing market is now set up for a huge crash in 
    prices, since there is no more fake paper equity from the sale of a 
    previously overvalued property and because the market for 
    securitized jumbo loans is dead. Without that fake equity, most 
    people don’t have the money needed for a down payment on an 
    expensive house. It takes a very long time indeed to save up for a 
    20% downpayment when you’re still making mortgage payments on 
    an underwater house.
    Because the housing bubble was not driven by supply and demand. 
    There is huge supply because of overbuilding, and there is less 
    demand now that the baby boomers are retiring and selling. Prices 
    in the housing market, even now, are entirely a function of how 
    much the banks are willing and able to lend. Most people will borrow 
    as much as they possibly can, amounts that are completely 
    disconnected from their salaries or from the rental value of the 
    Because first-time buyers have all been ruthlessly exploited and the 
    supply of new victims is very low. We were all corrupted by the 
    housing boom, to some extent. People talked endlessly about how 
    their houses were earning more than they did, never asking where 
    all this free money was coming from. Well the truth is that it was 
    being stolen from the next generation. Houses price increases don’t 
    produce wealth, they merely transfer it from the young to the old - 
    from the coming generation of families who have to burden 
    themselves with colossal debts if they want to own, to the baby 
    boomers who are about to retire and live on the cash they make 
    when they downsize.
    House price inflation has been very unfair to new families, especially 
    those with children. It is foolish for them to buy at current high 
    prices,Every “affordability” program drives prices higher by pushing 
    buyers deeper into debt. Increased debt is not affordability, it’s just 
    pushing the reckoning into the future,The government pretends to be interested in affordable housing, but 
    now that housing is becoming truly affordable via falling prices, they 
    want to stop it? Their actions speak louder than their words.
    Builders are 
    being forced to drop prices even faster than owners, because 
    builders must sell to keep their business going. They need the 
    money now. Builders have huge excess inventory that they cannot 
    sell at current prices, and more houses are completed each day, 
    making the housing slump worse.
    Always remember this ,home ownership is a big illusion created by 
    the masterminds,the free and clear home owners are the real ones, 
    and the other ones might own some equity , a lot people are 
    homedebtors not homeowners it ‘s very important to understand 
    these simple concepts .

  6. Anderson says:

    You got me really interested on those two previous bubbles, is there any public source where I can find data about them? Thanks!

  7. Brazilian Bubble says:

    And don’t forget the “bolha dos flats” in the late 90′s (http://www.rafaelcmonteiro.com/2012/08/investir-em-flats-ja-era-veja-novembro.html). It was common to see people buying flats for R$250k to just sell it for $60k 3 years later. People have short memories.

  8. Bruno says:

    Austrians in IPEA? That’s odd.

  9. Ailton says:

    well-spoken ! said it all !

  10. Oraculo de Ipanema says:

    At least search the web for the correct interest rate, before writing on a website, pal!

    As a matter of fact, do you know what an interest rate is and what is it for?

    It is not about the fat you have, but how much you can burn! And there’s no liposuction in Economics…

  11. Andre Kenji says:

    Property bubbles in Brazil are very different than in the rest of the world because the Brazilian Law do not allow someone to lose the home where they live due to debt. Property prices are really high in Brazil and that´s is unsustainable(It´s cheaper to buy a house in Miami than in São Paulo) but that would not have the same effect than the Spanish or the American bubble.

    Besides that, I would not blame the Brazilian government. The problem is that the American Fed is printing a lot of money, and that money, that the Fed lend to banks for free, is being invested in the so called emerging world.

    And yes, Brazil is the country of favelas. So, there is no houses being built in excess.

  12. Gaston says:

    At the beginning of this year we made a video on Bubbles (Tulip mania and the 1720 Crisis)
    Hope you like them

  13. alexNY says:

    Andre Kenji intresting that you would thing that people will not lose their homes if they defalt, this just shows how uninformed people are in brazil ,
    The main reason why banks never lended money for properties in the past was that , the risk was to great , they couln not remove a family from the home ,and the main reaosn why they stated lending was becouse laws have changed , now people will lose theis homes if they defalt for sure.

    unless the brasilian gov socialise losses , then everybody will pay and the economy will colapse anyway

  14. alexNY says:

    O imóvel único de família somente poderá ser penhorado em casos específicos que a lei determina, como por exemplo: dívidas que sejam do próprio imóvel (financiamento, condomínio, IPTU, hipoteca), pensão alimentícia, quando o imóvel tenha sido dado em garantia (escrita e assinada) à uma dívida (fiança em locação e outros casos) ou por dívidas com trabalhadores domésticos da própria residência.

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