By Samy Dana (via Folha/Uol).
It is not the first time that I warn you about the risk of a property bubble burst in Brazil.
Sooner or later, the market will become aware of the overwhelming and irrational rise in property prices, and like a domino effect, prices will quickly correct, as always happens during bubble bursts. Remember that these same prices took several years to climb.
This week the issue came to the fore again when the economist Robert Shiller, professor at Yale University, warned Brazilians about the “dot-com bubble” and the housing bubble in the United States, and placed Brazil in his speech of concern.
According to Shiller, “property prices have doubled in recent years, and now people are taking loans to buy real estate. If prices collapse, this will lead to the same problem we had in the United States.”
All this excessive speculation can be summarized in four points :
1. The government has poured more than R$ 1 billion in credit for the “Minha Casa Minha Vida” program. And it plans to add another R$ 1 billion for the “Minha Casa Melhor” program – which are excellent programs from a social point of view, but have other side effects.
2. There is a strong incentive for borrowing. In a recent report, the International Monetary Fund (IMF) has suggested that the Brazilian government slow the pace of credit extension. The government is more concerned to boost demand, but forgets about supply, which by the way is not following this trend.
3. In January this year, in an attempt to attract capital inflows, the government withdrew the IOF (Tax on Financial Operations) of foreign investments in real estate funds. On one hand it attracts capital to the country, on the other, it facilitate the formation of a bubble as it promotes foreign speculation.
4. There is a cultural and psychological factor that most Brazilians embrace, which is that buying property is a safe investment with infinite gain. In other words, most of the population believes that real estate can never depreciate.
So if you are thinking of buying a property in Brazil as an investment, first think about the millions of Americans who had this exact same logic in the United States until 2008.