Is Brazil’s property bubble about to burst?

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.

10 Responses

  1. 13/04/2012, Ana Burman wrote

    Good insight on Brazilian property market. I am originally from Brazil and bought a one bedroom flat a couple of years ago on the beach side in Vila Velha. Add to this equation the vast gas and oil reserves found in the last few years in that region and you will have more than 100% increase in the prices in the same period. We keep wondering if it is time to sell and walk with the profit or to upgrade… In the meantime we get a 6% yield a year on the rent – not bad at all! But as always time will tell, but if we look back at the record it gives us the creeps…

  2. 14/04/2012, Michael wrote

    I live in the UK but I am currently in Brazil for work. In the city I am writing from, I would say part of the bubble has already burst. There are plenty of unfinished apartment towers. These blocks were built (mainly) for foreigners, but they appear to have vanished recently. In Rio and São Paulo the bubble is reaching madness level. I have a friend from a borough next to Rio who bought a 2 bed flat in 2002 and today it is worth more than triple of what she paid. They rent it and rental yield is 4.8% gross. They tell me half of this goes on tax. For a country where you can get 8-10% in the bank, there is a massive mismatch between house prices and rental yield. Simply not worth it without capital growth. Needless to say, the economy is too dependent on the real estate market and when the bubble pops, the economy will be in trouble. When I look at it, in many ways it reminds me what happened in the UK. Even the fact that the bubble is under a labour government!

  3. 15/04/2012, Elvis Presley wrote

    What is it with shaved apes and property? No matter where you are in the world, the shaved ape loves a property ponzi scheme.

  4. 15/04/2012, Boris McaDonut wrote

    A friend of mine was pleasantly surprised by the regular nightly firework displays over the Barrios, until it was explained this is a warning for the police to stay away as the drug dealers are making a delivery. Brazil has many problems, not least it’s vast size and dispersed populace. But infrastructure projects there are aplenty. Ultimately Brazil and Mexico will conflict over who leads Latin America…….. Mexicans speak Spanish and border the USA, so Brazil has the short straw.

  5. 07/05/2012, Ruban Selvanayagam wrote

    The fundamentals of the market are strong (the credit sector, for example, is not highly leveraged) – but, yes, prices have increased disproportionately to income and beyond feasible investment levels especially for middle-upper class real estate. The low income housing sector, with a deficit at a debatable 15 million units, offers the greatest opportunity (although currently also weighed down by a number of inefficiencies).

  6. 10/06/2012, Henry wrote

    I find it very hard to see someone posing as an authority write, “…mortgage lending has, in the words of Capital Economics, “exploded”, more than doubling as a percentage of GDP since 2005.”
    This is very poor journalism, while it has indeed doubled, it comes from an extremely low level – mortgage lending has gone from 2.5% to 5% in those 7 years (while mortgages in the UK are 81% of GDP, and in the US 73%). Rather important piece of information withheld to give more impact. Sad to see.
    Consider then that prices in Sao Paulo and Rio are still very cheap when looking at international comparables, and consider how quickly interest rates are coming down. How do you figure there is a property bubble? Are foreigner press unable to look beyond Leblon?

  7. 17/08/2012, Bill wrote

    We have property in the north east of Brazil close to where Merryn was talking about 4 years ago. Prices are still low and rentals are buoyant but you need a local contact to run the property which will cost you 20% in fees. Your clients will be Brazilian from Sao Paulo and Brazilia .
    These two big cities have lots of rich people and they have the money to fuel price increases in their local environment. Fortunately for us they love the seaside. If you want to invest in this area of Brazil, which is still cheap, have a look at our book found at Amazon Kindle called Dancing on Ants.
    The North East of Brazil is still in our opinion a good opportunity to make money on both rentals and capital growth.

  8. 18/09/2012, Nancy wrote

    The real booms are in Rio and Sao Paulo.
    Property Agents selling 3000 km up north (especially the ones from outside Brasil) are only too eager to use those figures for their own benefits. Of course, this gives a completely incorrect figure.
    Apartments for 40-80k are rarely larger than 30m2 and cheaply built, with high service fees.
    Unless you rent it out yourself, and collect the money overseas, you WILL be robbed by either the porter or the estate agent.
    Many areas in Natal (from the previous article) are ghost towns, with numerous empty (and ugly) half-finished apartment towers. The developers were aiming at the Europeans, when the Real was 40-50% weaker.
    Natal has become a very dangerous destination, with mugging and robberies are ‘normal’.

    Brazil is a beautiful country to visit. But think thrice before investing. I know of people who were scammed twice, with their lawyers, estate agent and notary being part of the scheme.

  9. 08/02/2013, unsi wrote

    If you are a foreign investor, have you consider alternatives ?

    What CAN YOU DO in BUENOS AIRES with US$ 300.000-400.000 ???

    For quality architecture see: http://youtu.be/eWNCESNOTes & http://youtu.be/Oe8Wg6JPhPo

  10. 12/02/2013, alex wrote

    I am italobrazilian from south of brazil porto alegre I can say that is huge diference south between south and north ,in tth south I’ve got one apart 100square mts thats worth 150 k uk but north is still easy to find aprts for half of that ,is diferents world ,more mess around but when the things goes right there will be like south ,and the bubble i dont believe because is very hard to get a mortgage ,you need to prove really that you can pay off ,and need big deposit ,of course for council houses not but this is houses cheapest in the world for 20 k you buy one i believe still good time to invest the best is gone but still good ,brasil wiil grow a lot in the next 5 years so go for it…

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