How Much is Too Much?

Editorial

RIO DE JANEIRO, BRAZIL – This week we published a story about Copacabana, and in some cases rental costs increasing 100 percent in the last year, and property values up 50 percent. Although it is not a full scientific market survey, few can argue the drastic increases in real estate happening in Zona Sul (South Zone). From personal experience, the cost of a temporary apartment I was looking to rent in Ipanema has literally gone up 35 percent from just a year ago.

I’m no economist, but I have lived through two bubble bursts (recessions) in the last twenty years of my adult life, and my money is staying out of this game. There may be great opportunities in Brazil and Rio right now, but it is scary to see how much and how fast property values have increased in some areas.

Of our News Sections, Real Estate is one of the most popular, and about six months ago we published a pair of stories about the Brazilian real estate bubble, and how Rio may be protected from a bust.

At the time I thought some good arguments were made about Rio’s insulation from a market down-turn. Namely that mortgages are not used so speculatively here, if at all, and the limited amount of property available along Zona Sul’s beaches.

Now, I feel less certain, as the increases are so dramatic, and general inflation is so high, and while Brazilians may only be able to put themselves at a certain level of risk with property, human nature is to over-extend, and there are other ways to do that.

According to Wikimedia: “A real estate bubble or property bubble (or housing bubble for residential markets) is a type of economic bubble that occurs periodically in local or global real estate markets. It is characterized by rapid increases in valuations of real property such as housing until they reach unsustainable levels and then decline.”

In the article about Rio real estate being shielded, there was some good debate and a point made by Jim (who I know as a smart guy very familiar with Rio). Jim pointed to the high demand and limited supply, and wrote: “When you visit New York, do you complain about the price of apartments overlooking Central Park too?”

While Jim has lived in Rio five times as long as me, and has a background in economics, he is also a property owner and perhaps biased in his prediction. As any Zona Sul property owner must be right now, imagine your US$150,000 Ipanema apartment you bought in 2007 being worth US$400,000 now… (I sure can – and I wish I did every day.)

But a quick look at recent economic bubbles shows us that they are hard to predict, especially by people in the affected market. I was front line in the “Dot-Com” bubble and never thought it would end – everyone needs a web site right? The last real estate bubble I wasn’t directly in, but no one I spoke with thought it was bad business, everyone was making money.

Now, many Brazilians are making great money at the moment, but so many are not. As I’ve pointed to before, Brazilian ‘Executives’ are the highest paid in the world. The average salary for an executive in Brazil is US$600,000 per year… but this is still a country with a minimum wage of US$4,384 per year.

I don’t know what will happen of course, but I’m not putting my money in this game… The smarter move may be Tijuca… or Macaé.