Real Estate Market Cools in Brazil, But Not Crashing Yet

By Jay Forte, Contributing Reporter

RIO DE JANEIRO, BRAZIL – The real estate market in Brazil saw staggering growth in the last seven years, and coupled with a national booming economy it looked like a positive trend. However most analysts, and certainly those hoping to buy or rent, have been waiting for a housing bubble to burst and for the last year many have urged caution.

Neil Shearing of Capital Economics said, “Good news remains thin on the ground in Brazil, but we take some comfort from the fact that the country’s frothy housing market has so far managed to avoid a hard landing.”

“It’s still early days, but the initial signs are that Brazil’s housing bubble is deflating via a gradual moderation in prices, rather than via a sharp and sudden drop in prices that can cause steep falls in household wealth and destabilize the financial system.”

According to a report in April 2012 by Capital Economics, residential property prices in São Paulo had doubled within five years, while prices in Rio had tripled. Since then they have continued to climb with prices in São Paulo now tripled since 2008, while prices in Rio have almost quadrupled. A nation-wide price series began in mid-2010 and shows that prices at a national level have increased by seventy percent in just four years.

On the flip side two factors show merit for a substantial increase in the demand for housing. Brazilian labour data reported GDP per head has increased by sixty percent since 2008, and at the same time, the rapid development of a mortgage market has made housing finance easier and cheaper to access for millions of Brazilians.

The volume of loans for the acquisition and construction of buildings has been on the rise – reaching R$9.7 billion in May 2014, an increase of six percent from the month before. According to the Brazilian Association of Real Estate and Savings (ABECIP), it was the second best result for a month of May in the past twenty years – a sign that Rio’s real estate market would continue to stay strong in 2014.

However Shearing says, “We still find the sharp rise in prices difficult to justify against economic fundamentals. For a start, prices have risen far faster than incomes – whereas GDP per capita has risen by sixty [percent] since 2008, house prices in Sao Paulo have tripled.”

“What’s more, although the spread of mortgage finance would justify a rise in prices, other emerging markets have seen similar increases in mortgage lending to Brazil, but house price gains have been far more modest. Finally, house prices seem expensive relative to rents. […] Based on a range of indicators, in 2014 we estimated that at a national level Brazilian housing could be overvalued by around 30-50 percent.”

The good news according to Shearing is that house price growth has slowed to more normal rates in recent months. At a national level, prices rose by 6.3 percent year-over-year in December, down from a peak of over 25 percent year-over-year at the start of 2012.

Price growth has also slowed in the cities where the risk of bubbles appeared greatest – notably São Paulo and Rio, and in most places, house prices are now growing in line with CPI inflation and nominal GDP growth.