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By Emile Phaneuf, Contributing Reporter

RIO DE JANEIRO, BRAZIL – Real estate prices in Rio have risen rapidly in the last year, since it was announced in 2009 that the country will host the 2014 FIFA World Cup, and then the 2016 Olympics. Along with the pre-salt oil discoveries and general strength of the Brazilian economy, everything seems to spell big opportunities for real estate investors.

Brazil Real Estate stabilized by low mortgage levels
Brazil real estate stabilized by low mortgage levels, image provided by Salvatore Vuono/FreeDigitalPhotos.net.

Almost R$2.56 billion (roughly US$1.56 billion) are expected to be spent on specific planned housing and hotel accommodation projects in Rio de Janeiro for the Olympic Games alone. Preparation for the World Cup will bring a number of investment opportunities of its own as it will be hosted in twelve different cities throughout Brazil (with the finals held in Rio).

But the boom is not driven strictly by a demand from football fans and oil workers. Brazil has an emerging middle-class, hungry to buy homes, and the federal government has been taking important steps intended to provide them with access to credit.

The “first big break” under the Lula administration, according to the Global Property Guide website, “was the government’s approval of fiduciary alienation, whereby the buyer becomes the owner of the property only after it has been fully paid.” This minimizes the risk for the Brazilian banks in case buyers default on their loans, so they are now more willing to lend to potentially riskier buyers, can provide longer payment terms and even (relatively) lower interest rates.

Discussion of Minha Casa, Minha Vida program in Brasília.
Discussion of Minha Casa, Minha Vida program in Brasília, April 15, 2010, (left to right) National Secretary of Housing Inês Magalhães, Minister of Cities Marcio Fortes, President of CAIXA Maria Fernanda Ramos Coelho, and VP of CAIXA, photo by Agência Brasil.

Brazil’s Growth Acceleration Program (referred to as PAC, and formerly headed by Dilma Rousseff), includes measures by both Caixa Econômica Federal (referred to as CEF or CAIXA, a government-owned bank) and the Brazilian Development Bank (BNDES) to provide loans, long-term credit for infrastructure, sanitation improvements, and more under a new investment fund that began with R$5 billion and another R$12 billion expected in the near future.

Under the CAIXA-administered Minha Casa, Minha Vida program, the federal government in conjunction with the states has also begun development of 1,000,000 houses and apartments for families with a monthly income under R$4,900 with an initial operating budget of R$34 billion.

But this housing boom has led some to believe that a bubble has been or will be inflated and could potentially burst. Rio Apartments Group CEO Hakan Olsson foresees no bubble for several reasons. “First,” he says, “it is hard to get a mortgage in Brazil and a large portion of the property is bought with cash. You are not able to have higher mortgage payments than around 30 percent of your salary. This means there is no real speculation (as was the case in the U.S.).”

Mortgage levels as a percent of Brazil’s GDP is roughly 3 percent in comparison with 65 percent in the U.S. and 46 percent in Spain, he says. Brazil’s sub-prime mortgages are only roughly 3 percent of the total mortgage market in comparison with 63 percent in the U.S. and 10 percent in Spain.

Steve Rubens, a real estate lawyer working in Brazil, agrees that a boom and bust is unlikely because Brazil’s boom is much less “debt-fueled.” He also gave similar figures for mortgage as a percent of GDP, and points out that obtaining credit in Brazil is quite different than estrangeiros (non-Brazilians) may be accustomed to.

“Housing debt is in its nascent stages in Brazil as compared to the U.S. or EU, and it is still difficult to obtain a mortgage, particularly with good terms. For instance, individuals with a decent income but not a fixed salary have difficulty obtaining a mortgage in Brazil.” explains Rubens. Foreigners often purchase property in Brazil by using a second mortgage on property in their home country allowing them to benefit from lower interest rates.

While many may find the rapid increase in housing costs alarming, especially in Zona Sul (South zone) which includes the popular Leblon, Ipanema and Copacabana (which will host part of the Olympic Games), experts seem to agree that any massive devaluation like the U.S. mortgage crisis is unlikely.

“There may come a point where valuations excessively outpace the incomes of residents which would result in a tapering off of demand. In the U.S. home buyers were able to purchase properties well beyond their means. This is not the case in Brazil due to the more restrictive housing debt market,” says Rubens.

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31 COMMENTS

  1. Sorry Diego, but I have to agree with the article. There is no bubble if owners are not in over their heads. We have had it too good in the past when the dollar was king. There is limited space in the “zona Sul”. It is prime real estate for both turists and residents. When you visit New York, do you complain about the price of apartments overlooking Central Park too?
    When Brazil gets reasonable interest rates in you will see the price of real estate triple from where it is now. Most likely there will be a weaker dollar in addition since the United States is currently spending without any idea how to pay the bills. Why not save/beg/borrow/steal enough to buy in and then, if you want, you can rent your apartment to someone cheaply.

  2. I don’t know enough about real-estate economics to make an accurate prediction… just that i HOPE the market crashes and rent prices drop. Because of the World Cup and Olympics and UPPs, the prices are out of control…

    I realize that i don’t have to live in Zona Sul – but for my work and for the things that i like to do, it’s just better transport-wise. Places like Tijuca are fine and whatever, but the the traffic jams and over-crowded metro is the problem. And i love Santa Teresa, but again, the transport…

    Haha, yeah… i would buy a place if i could. But at the moment, my budget would only allow me to buy a place in a favela – which i’m not against… i just have moral issues about gringos buying up property in the favelas at the expense of those who are actually from there… like all these Germans who are exploiting the hell out of Vidigal…

  3. And speaking of NYC – one of the cool things about living there, is that it didn’t matter to me where i lived within Manhattan – because the subway system in addition to being efficient, is incredibly well-priced with an unlimited metro-card…

    Why can’t the prefeitura here implement something like that..? The Bilhete Unico is a start, but i’d love to see monthly unlimited metro / bus cards being sold. If that was the case, then i wouldn’t have any qualms about living in Tijuca or elsewhere in Zona Norte…

  4. Diego,
    I see your point but I don´t think the rise in prices is so tied to the Cup and Olimpics. It is more the economy and lack of housing in the zona sul. There is a lot of Brazilian money overseas and they are getting tired of seeing their dollars devalue, earning next to nothing in interest. A lot of that money is being invested back in Brazil contributiing to the rise in local real estate.

    Don´t forget the Barra effect. There are cheaper apartments in Barra but you need a car and the traffic is terrible. It is almost impossible to live in Barra and work in the Centro. Some of those Barra people are moving back to the ZS to reduce daily travel time.

    I like the idea of fixed price metro cards since I have enjoyed using them in other major cities. The problem with the Rio metro is that there is not so many places to go like in NY, Paris and London. Here you can only go, then come back. For example, how many times would you use, say Tijuca-Ipanema/Ipanema- tijuca in one day.

    Conclusion: The root of the problem is in the public transportation system. That is where the investments need to go.

  5. The fixed price card i have in mind, would be like NYC, in that it could be used on both buses and trains (metro).

    Agreed, the public transport system IS the man problem and strongly connected to housing prices. I think that way too many people drive, when really, there is no need for a car in a city like RJ. It’s more of a status thing, it seems… and represents RJ’s social-class divide…

  6. I agree that a transit card would be nice. It even amazes me that the prepaid cards don’t offer a discount for a higher spend. People lose the cards etc so offering a discount for ever $50 placed on it would not hurt them at all.

  7. Gerald,
    Of course the answer to that depends a lot on who you are and what investments you have other than this home.
    I will assume that you do not have a need to get your money back quickly and are looking at this as an investment rather than a home. If you are happily living there, it is like the diamond that you give your wife. You justify it as an investment but it is not really, since it is never for sale.

    Real estate is a long term investment and no one knows what will happen. In the short run, markets go up and down, exchange rates fluctuate. In the long run, markets like this tend to go up.

    My educated guess is that 10 years from now the prices today in Rio will look cheap. I would expect by that time it will be normal to obtain a mortgage on your home which will also put upward pressure prices.

    I would hold if I were you until you need the money and would only sell with the aim to buy other real estate in Rio. .

    You said you bought in a favela. What title do you have? Did you do an “Escritura Definitiva”. Have you been able to register it in the “Registro de Imoveis” in your name? If not, it may be a good idea to pass it forward. In doubt, check with a lawyer.

  8. Thanks Jim!

    I do live there and love my home, however it was an investment as well as a place to live.

    I just think that it’s gonna go up a lot in value closer to the olympics etc. I’m a little worried that after the olympics and world cup are over, the drug traffickers will come back full force, which would devalue the property.

    G

  9. Hi Jim, I have been living in Brazil now for 8 years and have just found the Rio Times. It seems you have a in depth knowledge of Brazilian real estate, and would like to get your perspective on the housing market in other states. I live in Rio Grande do Sul and think the prices are through the roof (relative to other countries prices). Rentals are still OK, but wondering if I should bite the bullet and buy now or continue renting.

  10. I’ve been living in Rio Grande Sul for over 8 months now having come from living in Rio for over a year, one thing I can tell you Adam Fraser is that prices here are half of what they are in Rio.
    You are in fact very lucky not to have seen the kind of price increase as Rio’s Zona Sul has witnessed over the past 2 years.
    Porto Alegre is extremely good value for money in comparison and I would encourage you to buy here as the prices are only going to keep going in one direction – that being North!
    Your right Rent is well deserved here but from where I’m sitting the apartments on offer down here are – one’s that one could only dream of buying in Rio – high quality – well located – views and space are all easy to find.
    To find a well located 100sqm apartment in Rio Zona Sul now with garage – your talking about R$700,000’s – R$100,000 easy and you’ll still need to do work to it.
    You could get some thing really nice for half that price in Porto Alegre if you look around.
    Happy House Hunting!

  11. Adam,
    I am not sure if I know a lot or not about real estate but I have lived in brazil for quite some time and am married to a Brazilian real estate broker. It is wrong to think that the Brazil story will end after the olimpics. The world is becoming more aware of Brazil because of the world cup and the olimpics and in spite of an overvalued currency we are full of tourists. The boom will continue after the major events take place as long as the government does not screw it up. Brazil is a great place and will still be a great place after the olimpics. The only difference is that even more people will know about Brazil after the olimpics. Real estate prices will rise signifcantly if interest rates fall. When will that happen? Who knows, we raised interest rates last week. If you can I would buy now. it doesn´t have to be in Rio. Like TJ says, there are other places. Brazil is a big country.

  12. Sure, Porto Alegre is cheaper – but it seems so dull in comparison to Rio… it kind of defeats the point of moving to an exotic country in the first place. It would be like moving to the US and living in Iowa instead of New York City or Los Angeles…

  13. It does not matter what Porto Alegre is like – that was not the point, I was just using it for price comparison and change.
    Our Friend Adam Fraser lives in Rio Grande do Sul and I though it might be useful for him to know how things have changed in Rio compared to Porto Alegre – a city I bet he is probably familiar with.
    But thanks for your info on Porto Alegre – and just so you know the quality of life in Porto Alegre is a hell of a lot better for the middle or lower classes of Brazil than in Rio.
    To Work like most people have to – Porto Alegre wins hands down – but to spend copious amounts of money and enjoy your self – then RIo does win hands down.
    I’m lucky enough to do both in both City’s.

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