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.
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.
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.