This time four years ago, I wrote an article here about Brazilian property. I suggested that there was a reasonable chance that it might see the kind of boom that Spain saw back in the 1970s and 1980s.
Brazil was booming. Credit was becoming more freely available and property across the country looked relatively cheap. All the conditions were in place for a boom. No wonder then that Brazil got one.
Since 2008, GDP per head in Brazil has risen by not far off 50%. Wages have risen by roughly the same amount and employment is at record highs. The FT reports that head-hunted executives don’t get out of bed for less than a 30-50% increase in pay.
At the same time, mortgage lending has, in the words of Capital Economics, “exploded”, more than doubling as a percentage of GDP since 2005.
Brazil’s financial markets have deepened, but things have also been helped along, as is the modern way, by government efforts to increase homeownership among the ‘less well off’. The ‘Minha Casa Minha Life’ scheme provides all manner of familiar-sounding incentives, from 100% loans, very low interest rates, loans for deposits and so on.
The result? Prices in Rio de Janeiro and São Paulo have gone up 140% since 2008, while those in Brazil’s seven most important districts are up around 25% in the last year alone, says Capital.
Rents are up too. In Rio, average rents per square foot are up 35%. Clearly, house-price rises make sense given rising incomes and an expanding money supply. But might Brazil’s boom have now gone too far?
Capital thinks so. Look at a price-to-incomes ratio for São Paulo and Rio from 2008 and you will see that “house prices have increased at a far faster pace than incomes in recent years”. They have also out run nominal GDP quite substantially (50% vs 140%). “Ominously for Brazil” that was also the case for the UK, the US, Spain and Ireland before their own boom and busts. Moreover, while it is only one city (national data is hard to come by), prices in São Paulo are now above the average of emerging world city prices, while rental yields are below average.
So if it is a bubble, what might make it end? The hope is that it won’t have to end nastily – that it will deflate slowly via an adjustment in real prices (ie, average prices rise more slowly than nominal prices) as has sort of happened in the UK so far.
However, there is one thing that might make the transition nastier – a derailing of the Brazilian economy by a hard landing in China.
Either way, if you didn’t buy into Brazil four years ago, I suspect now might not be the time to take the plunge. It is fair to say that Capital Economics (rather like us) is prone to calling the end to bubbles a bit too early – Forbes reckons the bubble “has legs” until 2017. But better too early than too late.