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Brazil: Are Brazil prices heading for hyper-inflation? - Ruban Selvanayagam, Brazil Real Estate

Are Brazil Property Prices Heading into a Collision Course?

In recent years, Brazil’s housing market has been in the unique position of being supported by a strongly excelled economic climate – particularly in comparison to several developed countries worst hit by the effects of the global recession. When its GDP briefly went into the red in 2008/09 (along with many economies of the world), the government swiftly altered monetary policy by bringing the national interest rate to a historical low as well as amending fiscal policy and making other reforms to encourage activity. What ensued resulted in a relatively rapid recovery as well as the international spotlight being cast further on the country as a future economic superpower.

The country’s leaders have been pointing to the housing industry as one of the prominent lynchpins in the demonstration of such growing importance of Latin America’s largest nation. However, some economists fear the emergence of a housing bubble which has subsequently triggered an ongoing public debate with regards to whether Brazil’s market is following the hyper-inflationary trajectory that stifled its growth in the 1970s and 80s. For example in Rio de Janeiro, upon the announcement of the Olympic Games arrival in 2016, some agencies reported a 50 percent increase in house price values in the space of just 9 months. According to Globo, property values have increased by 100 percent in São Paulo in the space of 5 years; 50 percent in Brasília over 2 years and as much as 60 percent in Recife (in the north east) between 2009 and 2010.

On the one hand, price rises are to be expected and viewed as a natural progression of the success of the economy – the housing market in Brazil is being well reinforced by a range of factors including lower unemployment levels (Ministry of Labour statistics have indicated that over 1 million new jobs will be created in 2010); rising wages (according to the registry of employment, average initial salaries have increased by 27 percent in the last seven years); a very lowly leveraged mortgage market which looks set to grow considerably in the coming years as well as the fact that many existing homeowners having a considerable amount of equity stored in property (a very different situation when compared to markets of many developed countries). However, despite these favourable factors, concerns nevertheless remain that house prices have become increasingly excessive within such a short space of time.

In response, a report was thus recently published by Brazilian macroeconomic consultants – MP Associates – on behalf of the Brazilian Association of Real Estate Credit and Savings (ABECIP) entitled: “Are Brazil Real Estate Valuations Reaching Bubble Like Proportions, as Seen in the USA?” According to José Roberto Mendonca de Barros, author of the report and former Secretary of Economic Policy for the Ministry of Finance: "there is a price rise in property values because there is increased demand and we therefore have no doubt in saying that there is no housing bubble in Brazil."

Particularly in recent months, many professionals have been reporting a calming down of prices – largely as a result of the hikes in the national interest rate which began in May. Several have also attributed the price rise extremes as a result of restricted supply levels – especially in the country’s city centres. Construction levels have increased considerably with 1.2 million housing units expected to be created by the close of 2010 which is expected to bring the market into equilibrium. Unlike many countries in the world with so called ‘deficits’ – Brazil’s problem is very visible with entire towns consisting of poor housing, underlining the essential need for reform (many of these areas have been allocated infrastructural and urbanisation investment as result of social programmes such as the ‘My House, My Life’ and the ‘Growth Acceleration’ programmes). Others have also questioned the current indices of Brazilian house prices and state that such reports of rapid increases in house prices are a result of media hyperactivity without due regard to real economics.

It would therefore seem that, if a property bubble is emerging in Brazil, it is currently far too early to predict when it will happen. Investors should, however, be well aware of the fact that the country’s housing market should not always be viewed holistically and close attention is needed with local idiosyncrasies (such as supply /demand, rentals, taxes and legal jurisdictional variations amongst others).

Ruban Selvanayagam

Ruban Selvanayagam is a Brazil Real Estate and Land Specialist providing free e-books, state guides, up-to-date statistics, strategies, interviews, articles, weekly broadcasts and more. Brazil Real Estate and Land Investment Guide

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