By Mary Stokes.

Property prices and housing finance are on a tear in Brazil, leading to fears of a bubble. Housing prices have risen by over 10% so far this year on a nationwide basis. Meanwhile, home loans increased at an annual pace of over 40% in the first half of 2012, much faster than the 18% expansion in overall credit. This eye-catching growth is raising concern. Lending booms preceded the housing busts in Spain and the US. However, Brazil is a different story in a number of important respects.

There is no question that housing prices in Brazil have surged in recent years. In the country’s two largest cities – Rio de Janeiro and Sao Paulo – prices have risen at an annual pace of over 20% (Chart 1). Such fast rises are not sustainable, but we do not foresee a sharp reversal. The fact that the speed of housing price increases has begun to slow should help mitigate concern.

Chart 1: The pace of housing price rises in Brazil’s two major cities has slowed over the past year

Source: Fipe-Zap, Timetric

The other factor that reduces the likelihood of a dramatic housing bust is that the rise in housing prices has been driven – at least in part – by fundamentals, including a scarcity of adequate housing and a growing middle class. A study by the João Pinheiro Foundation, a government think-tank, estimates the country’s housing deficit at 5.8 million homes.

Greater access to finance has played a particularly large role in driving prices higher. But will access to housing finance continue to expand?

The short answer is yes. In contrast with advanced economies like Spain and the US, mortgages are still in their infancy in Brazil. During the country’s years of hyperinflation in the 1980s and 1990s, housing finance was virtually non-existent, and the vast majority of buyers paid for their homes in cash. Housing finance is still not widespread. Less than 50% of property purchases in Brazil are financed with mortgages. Consequently, the growth in home loans is coming from a very low base.

Home loans cannot rise at a double-digit pace indefinitely. Nevertheless, a housing bust along the lines of that seen in Spain or the US is unlikely. Even if home loan defaults were to rise significantly as occurred in these other markets, this would not pose the same degree of systemic risk to the broader economy because Brazil’s mortgage market is tiny.

As seen in Chart 2, the total value of outstanding mortgage debt in Brazil is around 5.5% of GDP. In contrast, Mexico and China have debt-to-GDP ratios of over 10% of GDP, while the UK and US have ratios in excess of 70%. The relatively low credit penetration in Brazil suggests the rapid growth in property lending is part of a broader financial deepening process.

Chart 2: Brazil has a relatively low level of housing finance compared with advanced economies and other emerging markets

Source: CIBC

Rapid credit growth typically precedes a spike in defaults, but we do not foresee mortgage loans in Brazil following this pattern. In contrast with what occurred in Spain and the US, Brazilian banks have not significantly relaxed their underwriting standards. A rise in the loan-to-value ratio often serves as a warning sign. However, in Brazil’s case, the loan-to-value ratio has remained broadly stable – reaching 71.5% in June. With few exceptions, buyers need to place a substantial down payment and cannot finance 100% of their home purchase.

The profile of borrowers should provide added comfort to those worried about a cascade of defaults triggering a housing crisis.  Most of the financing is destined for first-time home buyers and only a small number of borrowers hold more than one mortgage. The average household devotes less than 10% of their annual income to servicing their mortgage debt, which is much lower than advanced economies. Meanwhile, the default rate on home loans in June reached 1.9% – in line with the 2.0% default rate registered at end-2011 and the lowest of any credit segment.

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32 Responses to Will Brazil’s housing market go from boom to bust?

  1. Oraculo de Ipanema says:

    This articles looks extremely 2010-ish…

    I guess that after running out of plausible arguments, people are just refurbishing old reports and republishing it!

  2. JPN says:

    For the past 6 months I have been looking for an apartment to buy and I have spent a lot of time thinking whether we have a bubble in Sao Paulo (it is important to emphasize that I am writing about Sao Paulo city only. Rio de Janeiro might be a very different story b/c of financial investors).

    One thing it is important to mention: FIPE ZAP, although it the most renowned index, it measures OFFER prices only, so it is not an accurate measure of housing prices. I can not name another source of traded prices, unfortunately.

    Making a long story short: I do not believe there’s a bubble in Sao Paulo’s prices.

    Reason A: It is unlikely we will see a massive foreclosures and auctions even if mortgage defaults rise >> most of the people buying USED apartments are going to live in their new property and, according to the Brazilian Civil Code, if you have only one property and you are living in it, it can not be foreclosed, even if you default on the mortgage or any other debt! (know as “bem de familia”)

    Among the NEW apartments, we have a mix of buyers: users and investors. Those that will live in the property are the same case as used apartments. Investors are a risk to the market, but since the prices rose quite significantly since they bought, they could take a haircut, get rid of the mortgage and still make some profit.

    Reason B: There are potential buyers out there >> 2 years ago SELIC was at 12+% p.y. Using this “risk free” yield, people could rent a place and still be increasing their wealth (but they missed the house prices increase haha). Current SELIC at 7.25% p.y. barely covers the 5.5% IPCA inflation, so it suggests me that some people might be interested in buying a property, assuming a mortgage equivalent to what they paid in rent.

    But…

    Counter reason A: Prices reached the peak, or are very closed to it >> BRL 100k in debt at 8.5% (best cost I found) financed over 30 years mean a cost of approximately BRL 1k per month. A 50m2 apartment in Itaim, Moema, Jardins etc. can cost up to BRL 500k. Let’s assume a 80/20 debt to equity ratio, so this family is assuming BRL 400k in debt, costing BRL 4k per month (interest + principal) initially. Banks finance up to 30% of their net income, so this family must make more than BRL 13.3k per month net of taxes, or BRL 18,4k gross. My point is: what % of the families have this salary? Are they really willing to spend BRL 500k in a 50m2 apartment to live with their kids?

    That said, I must confess prices have been flat or decreasing since I began my search. An apartment that was initially advertised for BRL 950k had its price reduced to BRL 860k and I almost bought it for BRL 820k (but the documents were not ok). A brand new apartment in Itaim Bibi is being advertised for BRL 1.250k for 150m2 (BRL 8.3k / m2); not a long time ago, prices in this neighborhood were BRL 10+k/m2 for new apartments.

    ps. FIPE ZAP is so unrealistic that even in this blurry market, I visited an apartment that was priced at BRL 910k in the beginning of this year and is currently priced at BRL 1,060k. 10 months later, no buyer yet and the seller increased its price?

  3. Zabiziz says:

    I really want to know who is buying for first-time the houses in Rio. The medium annual salary in Brazil is 12k reais. In Rio is almost impossible to buy anything for less then 200k reais. If you want to live in some place that you can sleep well and in peace you have to pay at least 500k reais. If you make 12k per year, how is this possible?

  4. Zabiziz says:

    JPN, your counterargument A is perfect. Everybody loves to say that the majority of people is buying their first apartment.
    But who makes 220k per year in Brasil? Probably less then 0.1% of the population. Even so, they will buy a 50m2 house?
    In my opinion the situation in Brazil (even worst in Brasilia and Rio) is totally unsustainable. I agree that the contamination of economy if the bubble burst will probably affect less the economy than in US. But I really don’t see how the prices can rise more or even stay steady. The majority of the Brazilian population simply can not buy anything, so who is going to buy?
    About the selic. Brazil is still one of the greatest interest rates in the world. And worst, Brazil has today 5% unemployed rate. When the US and Europe rises there interest rate (and they will) the interest rate will rise even more in Brazil. In the near future we will see the rise of the interest rates and the rise of the unemployed rates too in Brazil. When this happen (2015 maybe) the scenario, in my opinion, will be very similar that we see today in Spain and Greece.

  5. Zerolaw says:

    JPN, your reason A isn´t true.
    The Law 8.009/90 don´t prevent the foreclose if the debt is due the mortgage. See art. 3º, II.

  6. jayme says:

    there is a bubble.. and it is about to pop.. maybe by february 30th….

  7. Ailton says:

    I thought brazilianbubble believed in a housing bubble in Brazil.

  8. Zabiziz says:

    About your reason A. That is not totally true. When you finance a house the bank is the owner, not you. All you said is true if you already finished your mortgage and you are the owner of the house.
    You can search on the banks websites and see that every month there are auctions for houses that someone didn’t pay.

  9. 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 
    high
    annual rent / purchase price = 6% means borderline
    annual rent / purchase price = 9% means ok to buy, prices are 
    reasonable.
    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.
    House prices will keep falling in the areas where prices are still 
    dangerously high compared to incomes and rents. Banks say a safe 
    mortgage is a maximum of 3 times the buyer’s annual income with 
    a 20% downpayment. Landlords say a safe price is set by the rental 
    market; annual rent should be at least 9% of the purchase price, or 
    else the price is just too high. Yet in affluent areas, both those 
    safety rules are still being violated
    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.
    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 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 
    property.
    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,Your debt is their 
    wealth. 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.
    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( MortgageOwners  not homeowners!! ) it ‘s very important to understand 
    these simple concepts .

  10. alexNY says:

    (if you have only one property and you are living in it, it can not be foreclosed, even if you default on the mortgage or any other debt! (know as “bem de familia”)

    ———————-

    That is not correct!! , if the debt you have was for the actual house even if the person is living in the house the bank can and will forclose

    laws have change and that is the only reason why banks started lending for purchases of homes

    here is the description of the law in portuguese

    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.

  11. CBo says:

    If low level of housing finance as % of GDP indicated low risk of bubble than housing affordability in Brazil shall be lower than in countries with high % of finance, right?

    But prices to income ratio in LAT are:
    Brazil: 29,7 times average income!
    Mexico 19,3 times average income
    Chile 12,8 times average income

    As you see, Brazil has low income, low credit and very high price. Only explanation is an irrational speculative bubble that resulted from huge amount of uninformed speculators who purchased buildings under development.

    Data from: http://www.globalpropertyguide.com/Latin-America/Brazil/price-gdp-per-cap

  12. Brazilian Bubble says:

    We do, but we are open for people who send us articles with their own views – the site should be fair to all opinion out there.
    Best,
    BB.

  13. SALAZAR says:

    BRAZILIANS HAVE A WAY OF SPENDING 300 K WHILE MAKING 30 K. RECENTLY THERE WAS A MILITARY POLICE GUY INTERCEPTED DRIVING A 500 K CAR TO PROVE THE POINT. LAWLESSNESS AND DISORDER IS THEIR MOTTO?

  14. McIvor says:

    Zabiziz: “About the selic. Brazil is still one of the greatest interest rates in the world. And worst, Brazil has today 5% unemployed rate.”

    What matters is the real interest rate, dude. If you count inflation(which is at almost 6% right now), the real interest rate is laughable.

    By the way, where did you get that 5% unemployment rate? It is way more than that.

  15. Luciano says:

    Exactly, Rodrigo.

  16. Luiz says:

    The reason B is not correct, too.

    “There are potential buyers out there”

    No there aren’t. The homeless people are very poor to buy anything
    The richest people and investors have dozens of them and they are selling now.
    Gringos too. They are investing in other much more cheapest countries, in America’s ocean Pacif coast, Mexico, and so on.

    After 2014 football CUP it will be hardest

  17. McIvor says:

    Zabiziz

    You did not understand my point. The REAL interest rate is what matters. Also if pretty much every country has zero interest or almost zero rates (which is the case now) Brazil’s will appear to be high. Statistics can be deceiving.
    Brazil’s REAL interest rate right now is extremely low.
    As for unemployment, it is just another fudged government statistic.

    You know nothing about Brazilian reality, my friend.

  18. BubbleJohn says:

    Yes it isn’t or until the Fat Lady sings a melody in D# Minor

  19. HelicopterBen says:

    Anybody want money. Plenty of it here. I got the printers going full speed.
    I got crates of the damn thing, I don’t know what to do with it all.
    So don’t be shy, ask and I’ll personally drop it off by Helicopter.

  20. HelicopterBen says:

    Let’s keep the Big Bubble going.
    The richest Country in the World in the most in debt. Pretty soon we’ll have to chop all the trees in the World to keep up with our printing machines.
    It’s a funny world this one we live in.
    I am starting to think we are monkeys or maybe we just behave like them, no offence meant to the Ape Family.

  21. Zabiziz says:

    yes is extremely low, but is still the number 4 in the world.
    My point is that Brazil comparing with the rest of the world is still with higher interest rates. That was what I wrote.
    About the unemployment rate, even if the number is greater than that (5.3%), Brazil is today without any doubt with the unemployment rate lower than historic numbers. And again, that is my point.
    People in Brazil think, like Spain some years ago, that everything will be always like that, and they will not.
    In my opinion in about a couple of years the interest rate will return to their historic numbers, and in Brazil it will not be different.
    In my opinion the same will happen with the unemployment rate, that will go up.
    When these two things happen the situation in Brazil will be very similiar to that of Spain today.
    Well, this is my opinion, but like you said, I know nothing about Brazilian reality…I’m just kidding here, saying a bunch of random stuff, and of course Brazil is the country of the future, if I were you I would go to Brazil and buy every home available and sell next year for twice the price today.

  22. Zabiziz says:

    Another person that knows nothing about Brazilian reality:
    http://mises.org.br/Article.aspx?id=1347

  23. Brazilian Bubble says:

    Brazil’s REAL interest rates (SELIC – inflation) is less than 2%, a historical minimum… that is lower than many other countries (but obviously not lower than Japan and US).

  24. Zabiziz says:

    According with the newspapers only 3 countries in the world have real interest rates greater than Brazil:
    China, Chile and Australia.

  25. Brazilian Bubble says:

    That is if you really believe that inflation is only 5.5% in Brazil…

  26. Zabiziz says:

    I agree with you that the inflation is greater than 5.5%, but can you tell me which country have a reliable inflation index?
    We can go even further, does any inflation index make sense? The things I use are different than that you use and so on…so my inflation index is different than your inflation index…
    Anyway I’m just saying that a lot of countries have a real interest rates lower than Brazil, is still cheaper get money elsewhere than in Brazil.
    But the real problem is that, a lot of people think that this little interest rates around the world will stay this way forever and they won’t.

  27. Rodrigo Rodrigues says:

    Consumer psychology is key here. The wealth effect grows as the avg consumer’s biggest investment (their home) is going up. The opposite occurs when that asset value is going down. Some consumers will lose their home, others will close their wallets and hunker down waiting tor the storm to pass. Yet others will not be able to buy even when they want to — banks become more restrictive due to the losses from the first group mentioned.

    Those dynamics create the domino crash that seems endless. 
    Greater Fool needs an even greater fool to keep the bubble going. Unless we have two suckers born every minute, the worldwide bubble will pop everywhere. Governments all over the world are trying to prevent this; but their actions will only delay the inevitable, so we have the banks controlling goverments and the Iluminnati on top of the pyramid,  
    The world is now based on virtual money. There is nothing real about money from the Fed. Debt, however, is very real. Only tangible’s like oil have limited supply. Virtual money is infinite. We were broke of real money in the 70′s. If government debt is in virtual money, then who can say with certainty what can and cannot be done. American money is virtual, but their surplus of tangible resources per capita is probably unmatched on this orb.
    Real Estate is an investment asset-class like stocks, bonds, gold, commodities, etc.
    What matters the most for any class is understanding the cycle, returns are there to be made in any class.

    Also, remember that Real Estate returns are mostly boosted by Leverage; that is how most people make 300% returns in a short time.
    End of the day, it’s all about WHEN you invest in WHAT.
    There are always cycles playing out in all asset classes and superseding each other, Brazilian Real estate is going tru a suicide cycle right now,numbers dont lie.

  28. Rodrigo Rodrigues says:

    410 k dollars for an ap? Are you going to pay cash?
    Sorry ! This might the biggest mistake in your life, At the peak of the market In Holland in the1630’s, tulib bulbs sold for as much as $76,000 (present day dollars). Six weeks later the same bulbs traded for less than a dollar. Economic modeling cannot predict or explain such pricing phenomenon because economic models make a critical assumption about human behavior that is rarely an observable truth. Economists assume rational consumer behavior in order to make future predictions. History has proven that nothing could be less rational than making such an assumption.

    To explain buyer behavior in any market where prices are changing requires careful consideration of the psychology of the market. Irrational and manic behavior influences every market, and the result is that prices change for reasons that cannot be explained without considering the ever-changing beliefs of the market’s participants. The story of Tulips in Holland is merely one example of how market psychology can change without any fundamental changes in the underlying market, and cause ruthless damage to those too deeply entrenched in the mania.

    The story began in 1593, when Conrad Guestner imported the first tulip bulb into Holland. Initially the rare bulbs were purchased by the wealthy as a sign of status and wealth, but soon thereafter speculators entered the market seeking to turn a profit, and as demand increased along side with trading activity, speculators earned very healthy profits. Tulips began to be traded on market exchanges, and by 1634 trading was conducted mainly by people in the middle class looking to make their fortunes in a market where prices steadily rose. Soon the entire Dutch nation, hypnotized by the success of the market, were selling their farms, livestock, and life savings to speculate on a single tulip bulb, and prices rose astonishingly quickly, with few people pausing to consider the rationality of the market’s behavior. Trading activity quickly spread across Europe to other exchanges, where tulip derivatives (in this case option contracts and futures contracts) allowed even greater speculation by broader cross sections of the population.

    Then came a seemingly insignificant event. The Dutch government began issuing warnings and started to develop regulation to help control what they believed was dangerous price appreciation. This prompted some speculators to cash out, believing that prices tomorrow could be lower than they are today should such regulation be imposed. Furthermore, another curious event happened. People grew new tulip bulbs, and tulips weren’t quite as rare any more. Soon thereafter, tulips began a slight downtrend, and all the speculators began to panic at the same time – unfortunately panic spreads like a virus, just much more quickly. With remarkable synchronism, the speculators’ had the identical reaction to lower future price expectations – sell the tulip bulbs today. The resulting price crash, possibly predictable by a psychologist or behavioral expert, could not have been predicted by an economic algorithm. The Dutch government tried to engineer a bailout, but the problem was too massive to prevent large numbers of bankruptcies, defaults, and lost fortunes. Bulbs were worthless, and the Dutch economy was crippled for decades.

  29. Jason says:

    While I completely agree that Brazil’s great “boom” is in the rear view mirror, I’m not entirely convinced that there is a housing bubble. Well, I should say, a housing bubble that would have a vast effect on the public in general. Like the article indicates, financing for housing in Brazil is extremely limited, (around 5 percent) and as such, I think the general public is pretty isolated from the problem. I lived in Sergipe for 2 years until two months ago, and, in my experience, they seem to be in line with Brazil in general. While housing prices in Sergipe have grown year over year to outrageous levels, it seems that these houses aren’t going to people who can’t afford them, or to those who are paycheque to paycheque. They are going to affluent people who have deep savings and assets. The type of people who can weather the storm.

    For me, Brazil’s protectionist policies seem to be its greatest hurdle going forward. Employment laws are archaic, taxes are insulating and the bureaucratic system is absolutely confusing. Also, skilled trades seem to be undervalued, and engineers overvalued. In a growing economy, skilled labor is essential. All of these lead to a system that doesn’t stay competitive. If the days of high commodity prices are behind us, Brazil biggest hurdle is the need for reform on all levels; a daunting task to say the least, but I think with a rising middle class, the government will have no choice but to change, even if reluctantly.

  30. Nicholas says:

    Real Inflation in Brazil is lower than in the US, yes I know, I live in Miami-FL where I witness rising fuel and food prices NOT included in CPI. So far I know, they don’t do that in Brazil.

    “I guess that after running out of plausible arguments, people are just refurbishing old reports and republishing it!”

    Yes, they do the same thing here in the US, since they are so obsessed with news from Brazil, something that never happened “in the good old days” when nobody understood or never heard of the word “bubble”..everything is a bubble now, no matter where they look. The typical mindset in the US is like this. If there is/was a bubble here, it must be worse outside (withoug knowledge outside their bubble).

    Facts are today: prices in the cities of Rio de Janeiro and Sao Paulo (that not represent the WHOLE nation…yeah think about that too for a minute) are in decline..which is good for new potential buyers. Bubbles are suppose to Burst and don’t bail out the speculators just as they did in Japan and in 2008 in the US <you know that so called capitalist nation that continue to bail out the speculators that lost tons of money.

    Anyone who believes that buying in Miami is cheaper than in Brazil is a fool and doesn't understand the hidden costs what will smack you in the face at the end of the fiscal year..plus rising property taxes that continue to get out of control.

  31. Nicholas says:

    By the way, it’s not the money printing is the REAL problem in the US. The real problem are, the money that’s being printed like crazy/ QE unlimited doesn’t go to the consumers by credit but it goes for free to the speculators that continue with their fraud, High frequency trading (HFT) on the fake free open market..aka speculating on commodities / creating fake scarcity so that prices go higher and betting on lower prices by manipulating the prices down….(speculators HATE regulations they can’t fix).

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