Housing Market in Brazil Draws Caution

By Lisa Flueckiger, Contributing Reporter

RIO DE JANEIRO, BRAZIL – The discussion about housing prices in Brazil was sparked again by a statement from renowned U.S. economist Robert Shiller, who predicted the American housing bubble burst. Shiller is reported as saying, “One can’t know for sure, but I suspect that there is a housing bubble in the major cities of Brazil. […] The fact that prices have doubled in the last five years does not sound good.”

In Rio, Fipe-Zap index registers an overall rise in purchase prices of 224.7 percent since January 2008, with São Paulo not far lagging behind. In the same time, rental prices have only gone up 131.1 percent.

“There are several reasons why we would have expected prices to have risen in recent years, [but] the sheer scale of the increase is difficult to justify. The market may be overvalued by as much as fifty percent,” Neil Shearing, Chief Emerging Markets Economist at Capital Economics, stated.

Prices have risen, as incomes in Brazil have increased. The nominal GDP per head has increased by fifty percent since 2008. The newly generated middle-class is eager for housing and with the development of a mortgage market, demand has spiked.

Yet, housing prices, especially in Rio and São Paulo, have risen far more than income has, which for many is an indicator of a bubble. Also, other emerging markets have seen a similar development of the mortgage market, but not such sharp increases in prices. The outpacing of rental prices is seen as a third factor pointing to a bubble.

There is a considerable lack of data in the housing market in Brazil however, as for instance the Fipe-Zap index only started in 2008. Caixa’s vice president of real-estate lending, Teotonio Rezende, dismissed talks of a bubble and attributed the increase in prices to a re-regulation of prices after depreciated values during the hyperinflation that plagued the economy in the 1980s and 1990s.

Johan Jonsson, CEO and founder of Agente Imóvel, agrees, “In the opinion of Agente Imóvel, there is no bubble. What has caused markets to crash around the world in all history are steep price increases nurtured by easy access to leveraged property financing. Brazil is nowhere near those conditions.”

Jonsson cites the substantial amount of down payment that has to be made in Brazil and the low mortgage default rate as explanations against a bubble. The rise in mortgages, eightfold in the last six years according to Bloomberg, can be justified due to its low level beforehand.

“Having said that, the cost of housing has risen faster than income in the last five years which may make due for a more modest growth in property prices in the near future. Again, though, this is not to be compared with a market implosion that a bubble burst should cause,” Jonsson continued.

Shearing, moderated the future outlook for Brazil in case of a bubble, “Looking ahead, there are good reasons to think that the macroeconomic fallout from Brazil’s property bubble may be less severe than for the U.S. in 2008. But at the very least it is another reason to expect consumer spending to slow over the coming years.”