By Ben Tavener, Senior Contributing Reporter
RIO DE JANEIRO, BRAZIL – The rate at which average Rio property prices have risen over the past five years is four times greater than that at which average wages have gone up, according to a report by O Globo newspaper. Industry experts say wealthy Brazilians have encouraged skyrocketing prices, which have outpaced financing options for many and exposed a widening gulf between the richest and the rest.
In January 2008, a square meter of real estate in Rio cost R$3,851 (US$1,975) on average; five years on, it costs 124.2 percent more, R$8,636 (US$4,429). In the same period, the average monthly salary in Rio has increased just 24.2 percent to R$1,902.80 (US$971), according to the IBGE.
As a comparison, online surveys show a square meter in New York City costs approximately US$14,000 (US$1,295 per square foot), with average salaries of around US$4,000.
Renting in Rio has also increased, up over 65 percent on average since 2008 – double the rate at which incomes have increased. Some rents have increased by over 230 percent in Rio’s most sought-after areas.
Industry experts say the boom in prices stems from it being undervalued in the early 2000s and that an overdue “correction upwards” was made, leading to a sharp increase in prices to the present day.
Other factors also stoked prices, including the boom of the petroleum industry, greater access to credit, political stability and a reduction in violence. But it was the prospect of hosting major international events, particularly the 2016 Olympics, that gave many the green light to seek wildly high prices for their property.
“People are asking unrealistic prices at the moment as they’re still caught up in the growth frenzy of the last few years,” James Lomas, from real estate investment firm Indigo, tells The Rio Times. Although many have spoken of the industry as a “bubble ready to burst,” Mr. Lomas believes the market will now level off for a time, with asking prices falling, perhaps with another surge in prices as 2016 approaches.
Alexandre Bradford, a real estate specialist at RE/MAX Principal in Rio, says demand is now far greater than supply in some neighborhoods, particularly “Zona Sul 1” – the South Zone’s trendiest areas, including Leme, Leblon, Ipanema and Copacabana, and it is the Brazilians who are buying as, “The market is now solely advantageous for those buying to live in the property.”
Yet for many, suitable financing options simply are not available, despite banks announcing lower interest rates on loans for those buying expensive properties, such as Brazil’s Federal Savings Bank, Caixa Econômica Federal, which in January announced lower rates for properties over R$500,000, as part of the government’s efforts to stimulate the economy and keep up with the property market.
Analysts also warn that the tax cuts will scarcely help anyone. “The kind of tax cuts needed to compensate for the appreciation seen in real estate over this period do not exist,” Gilberto Braga, economist at Rio’s IBMEC University, tells O Globo, adding that the 10 to 15 percent drop in taxes over the same period was far below the rise in prices in terms of price per square meter.
The result is that a select few super-rich Brazilians dominate and artificially inflate the market, while many others are forced to relocate to cheaper areas. Mr. Bradford believes there are enough of these areas so that mean middle- and lower-earning Brazilians and foreigners can find a place to live, but that some locals have been forced to move to areas outside of where they grew up.
Big questions remain over whether the economy will improve enough for those middle- and lower-earning Brazilians to be able to afford to buy property in this environment, and whether the property bubble stands a chance of bursting in the future.