By Ben Tavener, Senior Contributing Reporter

RIO DE JANEIRO, BRAZIL – In the past few years the cost of real estate has skyrocketed in Rio de Janeiro, especially in the sought-after areas of Zona Sul (South Zone). While property owners and developers have doubled and tripled their investments, renters and new buyers have struggled, and regulators may make efforts to help.

Jorge Hereda has said he fears an increase in the limit on homes eligible for financing, Brazil News
Caixa President Jorge Hereda has said he fears an increase in the limit on homes eligible for financing, photo by Fabio Rodrigues Pozzebom/ABr.

Despite lobbying by real estate industry representatives, the government has not signaled it is willing to increase the R$500,000 cap on the limit for homes financed by the Sistema de Financiamento da Habitação (Home Financing System, SFH).

Brazilian bank Caixa Econômica Federal president Jorge Hereda has said he fears an increase in the limit, as it would justify Rio’s rise in real estate prices. Many believe it would only encourage further increases in an already dangerous market bubble.

The average square meter of real estate sold in Rio rose a staggering 34.9 percent in 2011 – to R$7,421. The average residential rent in Rio de Janeiro increased 21.4 percent.

A mid-range two-bedroom apartments lists between R$350,000 to R$700,000 in most areas in Rio, O Globo newspaper says, but for something of higher quality and in the more sought-after areas in Zona Sul (Copacabana, Ipanema, Leblon) the prices reach R$1 million or more, particularly if you want to be situated near a metro station.

Mortgages in Brazil have traditionally been difficult to get, with particularly stringent requirements and very high interest rates. This has led to buyers having to save up money and buy in cash, or through the Consorcios process, which in part has shielded Brazil from the latest global financial crisis.

Much of this is changing though, as credit has been made more available in Brazil; the emerging middle class and economic growth is largely being fueled by credit markets. The research by APAS (Paulista Association of Supermarkets) shows that 53 percent of all Brazilian families are spending more than they earn.

Leonardo Schneider, vice president of Secovi-Rio told O Globo, “I have sold apartments from R$2 million for people who financed half. Today, families with incomes of R$25,000 can buy apartments from R$1 million in funding.”

Read more (in Portuguese).

* The Rio Times Daily Update is a new feature we are offering to help keep you up-to-date with major news as it happens.

5 COMMENTS

  1. There was clearly a strong pent up demand which the ability to borrow finally allowed to manifest in home/apartment buying. Then, it was magnified by the measures taken to pacify the favelas and grant land ownership (and the ability to sell) favela residences. Selling a favela residence can generate enough cash for a down payment on a non-favela residence, resulting in more demand for Zona Sul housing. Increasing the borrowing limit will certainly cause even higher prices, assuming supply remains limited.

    On the supply side, there is simply no available vacant land to build on in most of the Zona Sul. Significantly more demand, no new supply, means much higher prices. But, check out Niteroi. New supply (numerous high rise apartment projects) is meeting demand, perhaps even exceeding demand, and prices are stable to rising, but rising at a far lower rate than on the Rio side of the bay.

  2. The other impact on real estate prices in Zona Sul is the influx of money from International Investment Funds and individuals, especially from places like China. Other countries experienced a massive demand for high quality residential housing by places like China who turned the market into a form of “land banking”; ie purchase the property, don’t live in it and don’t rent it. The top of the market starts rapidly to increase because demand increases and supply diminishes. They then wait until price has risen dramatically and then sell. Countries like Australia moved quickly to change laws to prevent this form of land banking. Rio is happy to see the increases but the local population will be the ones driven into more debt. At some time the bubble will burstand the amount of debt owed on the properties will be higher than the value of the property itself.

  3. I’d like to mention that perhaps the Rio market has already reached bubble condition and its waiting to burst.

    I’d like to make a quick references to past to present for more realistic market pricing for real estate.

    In 1988 I was looking for property to invest in both Florida and Rio. I had to fly back and forth to exchange money to get decent value . The local foreign exchange was a bit too skimpy when at the time the exchange ratio was I believe around 3.5:1. If I remember the cost of living was moving pretty fast. Price was going up easy 50%/month.

    That’s when a brand new 1800sqft 3 bedroom bungalo with double garage in new subdivision in Florida was going for $60,000US. And that same house is going for around $180,000. 3x is the pricing multiple in almost 30 years. Discounting temporary balooning state overprice of $400,000 . Which would’ve meant 6.7x multiple.. And then it crashed to today’s value.

    Now lets go back to Rio de Janeiro that fabulous city of Magnificence everybody clamours for and full of activities both in festivities as well as miseries. In Rio 1988, around Copacabana area, a bachelor was around $15,000US, 1bedroom apartment around $25,000US, a 2bedroom was around $30,000. So that would be $45,000, $75,000, $90,000 for todays money, but it’s not..
    Lets put into this income perspective . In Brasil the minimum wage has risen about more than 4 times . There was slight increase in middle class earners but mostly the rich people who run the country hasn’t much changed. Sure there has been increase of Foreign investments to accentuate the demand in attractive areas of Rio but the problems with Shanty towns and their crime component didn’t exactly help . Income hasn’t risen that much either in that time.

    So we should take look at today’s asking prices which instead have risen to over $250,000, $400,000, $500,000 respectively. So that means multiples of lets say, almost 17x, 14x, 17x respectively.

    I’d say the future market correction would bring it back to way lower prices, specially after all that hoopla of World Cup and Olympics, or even before. To estimate new more stabilized pricing, even accounting for increased local and foreign demands, around , should top at 10x which is still a very respectable increase. Remember in that 7x was the point of bursting bubble in USA.

    So lets say multiple os 10x. That makes a bachelor $150,000US, 1bedroom $250,000US, 2 bedroom $300,000US. Considering today’s exchange ratio of 1.7:1 that would tilt those prices to even higher plateu for locals who earns in Real, making them less affordable.

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