Brazil Faces Real Estate Bubble

By Jaylan Boyle, Senior Contributing Reporter

RIO DE JANEIRO, BRAZIL – Fears among some analysts of an impending Brazilian real estate ‘bubble’ that could burst with familiar results appear to be intensifying as foreign capital continues to pour into the country. This bubble is seen as affecting not just realty circles, but the wider Brazilian economic environment.

Following the onset of the international economic crisis affecting traditionally strong markets such as Japan, the U.S., and the UK, investors have increasingly looked to so-called ‘emerging’ economies for better returns, principally the BRIC nations China, India, Russia and Brazil.

While the former three are seen as having inherent difficulties that may hinder growth, many analysts have seen Brazil as the pick of the crop. Some are now saying however that the Brazilian economy is showing signs of ‘overheating’, despite steps by central government to reverse the domestic stimulation measures instituted by Lula’s government while the global recession briefly bit deeply here.

While the International Monetary Fund (IMF) have committed to address the problem of large movements of liquidity into countries like Brazil, Finance Minister Guido Mantega has been pointedly critical because the IMF seem reluctant to “draw practical conclusions from it’s analysis”.

Central government is however, clearly beginning to take steps to control China-like growth, notably by doubling the tax on capital inflow from two to four percent recently. However, some analysts have remarked that this measure appears to have been less effective than anticipated, as the Real continues to appreciate, putting pressure on local exporters to stay competitive.

According to Newsweek in it’s end-of-year predictions for 2010, Brazil is at a distinct advantage over others in the ‘less advanced’ category. Russia is seen as having dropped out the race, as the government made it’s less than friendly monetary policies, as well as then-president Putin’s alarmingly authoritarian tendencies more transparent. India does business in a volatile neighborhood, and China, while still booming, especially where real estate is concerned, remains under a cloud of possible central government intervention.

Anecdotal evidence around Rio de Janeiro would support the idea that real estate prices are rising rapidly, with many telling of sudden rental hikes and overseas-based landlords coming home to manage properties that are appreciating in value. This could be in anticipation of the upcoming 2014 FIFA World Cup and 2016 Olympics. The danger is that property, as has been seen in other parts of the world, becomes over-valued to the point where a crash is inevitable.

A recent report from one of Brazil’s leading research agencies, the IBGE (Brazilian Institute of Geography and Statistics), has come out about housing affordability. The report states that 17.9 percent of households have great difficulty paying their commitments at the end of the month, 21.4 percent have difficulty; and 35.9 percent have some difficulty.

Of families who have ‘great difficulty’, 64.2 percent receive up to 3 times the minimum wage in monthly family income (R$1,395). Of families with incomes between 3 and 6 times the monthly minimum wage (R$1,395 to R$2,790), 24.2 percent indicated ‘great difficulty’.

At a press conference during this year’s IMF Spring Meetings, Western Hemisphere Department Director and former president of Chile, Nicolas Eyzaguirre offered a macro view warning, that “cheap and abundant external finances raise the risk of a boom-bust cycle”.