Actually, the burst of the Brazilian housing bubble may already have started but few are noticing.
The chart below compares the FIFE-ZAP housing price index of Sao Paulo and Rio de Janeiro with the share price of four major Brazilian real estate companies: PDG, Gafisa, Cyrela and Brookfield.
Looking at the data above (hat tip to the blog Deseconomia Brasileira), we observe a clear inconsistency since 2011. Companies that manufacture products that go up in prices should obviously experience a similar valuation in their own stock. But we note that, in fact, the real estate stocks experience sharp declines since 2011. The negative correlation and price decoupling is so great that it doesn’t even seem like one is comparing same sectors.
Here it is, all 6 prices since January 2008:
How come that companies that see their product rise in prices by 300% in 5 years experience such a drastic fall in their own stocks? Something’s gotta give.
The stock market is more liquid and leading than the real estate market. The U.S. housing stocks fell 30% from its top (Jan 2007 to Oct 2008) for about two years before “main street” took notice of how big of a burst the housing market was going through, causing falls even more pronounced in the overall American real estate market.
This may be a strong evidence that housing prices in Brazil may be in the final phase of the bubble bursting. The perfect storm is right there: high inflation, rising interest rates (reduced liquidity) and increasing unemployment.
Keep your eyes open…