Brazil’s composite FIPEZAP house price index dropped0.7% during the year to August 2016, itsseventh consecutive month of year-on-year nominal price falls. This is in sharp contrast with the 8.97% y-o-y inflation rate, so housing values aren’t keeping pace with inflation. When adjusted for inflation, nationwide house prices actually fell by 8.85% during the year to August 2016. Average nominal price growth has been slowing from 26.3% in 2011, 13.7% in 2012, 12.7% in 2013, and 6.8% in 2014, and down to 0.85% in 2015.
During the year to August 2016:
- In Sao Paulo, Brazil’s biggest real estate market, house prices rose by an average of 0.21% (-8%, inflation-adjusted), the lowest year-on-year rise since 2008. House prices in Sao Paulo increased 2.5% in nominal terms in 2015, 7.3% in 2014, 13.9% in 2013, 15.8% in 2012, 27% in 2011, and 24% in 2010.
- In Rio de Janeiro, house prices dropped 3.42% (-11.36% inflation-adjusted), the eleventh consecutive month of year-on-year price falls. House prices in Rio de Janeiro fell 1.36% in nominal terms in 2015, after annual rises of 7.6% in 2014, 15.2% in 2013, 15% in 2012, 34.9% in 2011, and 39.6% in 2010.
House prices in São Paulo rose by an amazing 223.8% from January 2008 to June 2015 (106.3% inflation-adjusted), and in Rio de Janeiro house prices rose by an even more spectacular 266.1% (133.3% inflation-adjusted).
The Brazilian property market’s staggering growth over the last seven years was supported by a booming economy – prompting finance professor Fabio Gallo to argue, “We don’t have a bubble. A bubble means a lot of increases in prices for nothing. You had real reasons for the expansion of the prices in Brazil. After this, we have to reduce, to put the prices in their correct level as a matter of fact.”
Brazil's GDP per capita increased by a whopping 60% since 2008, according to the country's labour data. The 2007 discovery of enormous oil fields located deep beneath a layer of salt in the Atlantic seabed also boosted the energy industry’s demand for residential and office space. Demand continued to surge following the 2009 announcement that Rio de Janeiro would host the 2016 Olympic Games. Rapid development of the mortgage market, which followed the sustained decrease of historically high interest rates, and legal reforms that streamlined the foreclosure process, also supported the surge in home prices, according to Fitch Ratings. Interest rates were progressively cut from 26% to 7.25% between 2003 and 2012.
However since 2013, there has been a noticeable slowing of property price rises. Last year, house prices rose slightly (in nominal terms) but actually dropped significantly when adjusted for inflation. The price correction is expected to continue as the country contends with high inflation and deep recession, compounded by the continued weakness of the real.
Brazil’s Central Bank is not in stimulus mode and is expected to keep the benchmark interest rate at its currently high level, amidst high inflation – thereby discouraging prospective homebuyers. The key rate currently stands at 14.25%, the highest level for almost six years.
The market is also adjusting from the over-investment in housing in the mid 2000s with the launching of the My Home, My Life program. The program funded developers to build low to moderate income housing and expanded the market for 30-year mortgages in Brazil.
It seems that the positive gains from the recently concluded Olympics Games have been offset by negative factors. House prices are expected to plunge by as much as 30% this year, amidst the country’s ailing economy, falling demand, and declining liquidity at major construction companies, according to GuardeAqui.
Analysis of Brazil Residential Property Market »
Since the end of 2013, 120 square metre apartments in Sao Paolo have moved down from approximately US$450,000 to approximately US$320,000. In Rio the decline is from around US$775,000 to US$500,000.
Gross rental yields - what you can earn from an apartment before tax and other expenses - have continued to move down, and in most parts of Sao Paolo and Rio being a landlord generates a much less attractive return-on-investment than it did a few years ago. In Rio, yields of 3.5% to 4.5% are typical, in Sao Paolo apartment yields are rather higher. These are not very attractive returns.
Rental income earned by nonresidents who reside in low-tax territories are taxed in Brazil at a special rate of 25%.
Capital Gains: Capital gains tax is levied at a flat rate of 15%.
Inheritance: Inheritance and gift taxes are imposed at progressive rates depending on the value of the inheritance. The maximum tax rate is 8%.
Residents: Residents are taxed on their worldwide income. Income tax is levied at progressive rates, up to 27.5%.
Registration requires no less than 14 separate procedures. The process can be completed in about 47 days.
The landlord is generally protected by a guarantor i.e., a third person responsible for paying any unpaid rental debts of the tenant.
Tenant Eviction: Evicting non-paying tenants can be difficult, as the courts tend to be saturated. The duration of eviction suits varies by State.
Brazil’s economy contracted 3.8% in 2015, after a meagre growth of 0.15% in 2014, 2.7% in 2013, and 1.8% in 2012.
Brazil’s economy grew by an average of 4.3% from 2004 to 2006 and then by an average of 5.6% during 2007 and 2008. Brazil wasn’t spared in 2009, but the economic contraction was minimized at 0.3%. Real GDP growth rates were 7.6% in 2010 and 3.9% in 2011, despite the adverse impact of the Eurozone debt crisis.
The economy is expected to contract further by 3.8% this year, before stabilizing in 2017, according to the IMF.
Fitch Ratings recently downgraded Brazil's sovereign rating into junk, in line with the other two major rating companies.
A struggling economy and high interest rates are two factors, which, in almost any economy, can be predicted to hit house prices.
A deadly combination of rising prices and slow growth is undermining the economy, the result of former President DilmaRousseff wrongly pursuing expansionary and populist policies in the aftermath of the global recession. To boost the economy, a tax relief program was introduced, along with subsidies and protection for industry, increased social welfare benefits for low-income earners and enormous infrastructure programs.
The Central Bank of Brazil also slashed its benchmark short-term SELIC rate from 13.75% in December 2008 to 8.75% by July 2009. Brazil was swamped with consumer credit from state-controlled banks during her first term, from 2011 through 2014. These resulted in a surge in wage growth, pushing prices higher. In an effort to curb inflationary pressures, the central bank raised the benchmark interest rate nine times from 7.25% in March 2013 to 11% in April 2014. But the drawback of these contractionary monetary policies was sharp economic slowdown. After holding the key rate steady for almost seven months, the central bank decided to raise it again by 25 basis points in October 2014, and by 50 basis points in December 2014. In 2015, the central bank again raised the key rate five times to 14.25%, the highest level for almost six years. The key rate has remained unchanged since.
Inflation, meanwhile, is mounting at 8.97% in August 2016, up from 8.74% in the previous month, and nearly double the central bank’s official target of 4.5%, according to the InstitutoBrasileiro de Geografia e Estatistica (IBGE). Inflation is expected to stand at 8.74% by end-2016, according to the IMF.
After plunging to its all-time low in January 2016, the Brazilian real is now showing some signs of improvement, largely in response to the formation of a new government. The Brazilian Real (BRL) strengthened by 24.7% in the past 9 months to reach a monthly average exchange rate of BRL3.2526 = USD1 in September 2016, making it one of the world’s best performing currencies this year. Investors are lured by Brazil’s high benchmark interest rate of 14.25%, more than 28 times the U.S. equivalent.
“Brazilian assets should continue advancing as interest rates remain low globally,” said VitorSuzaki of LerosaInvestimentos.
Brazil’s real plunged sharply in 2013-15 as crude oil prices - the country’s major export - continued to fall. From an exchange rate of BRL2.0293 = USD1 in January 2013, the real plunged against the dollar by around 50% with a monthly average exchange rate of BRL4.0553 = USD1 in January 2016.
Will Temer’s planned reforms save the economy?
In June 2013 riots exploded, precipitated by a BRL0.20 (USD0.10) raise in public transport fares, and complaints about excessive spending on mega-sporting events. But the real causes go deeper. Brazil’s infrastructure is in terrible shape – education is poor, public transport is terrible, state provision of ports, airports, an-0d health is of very poor quality. Many Brazilians spend up to four hours per day in traffic jams, either in their cars or on crowded public transport.
Brazil is not a poor country and the tax rates are extremely high. So the protests are better seen as an outburst of popular frustration at corruption – a protest against an intolerable situation familiar to many citizens in many other developing countries.
“Brazilians see no reason to have such bad infrastructure when there is so much wealth that is so highly taxed,” noted a CNN report.
Then came the corruption scandal involving oil giant Petrobras and the country’s largest engineering and construction firms. Several executives from Brazil’s top builders have been indicted for the multibillion-dollar kickback scheme uncovered at Petrobas, while the investigation has implicated politicians, mostly from President Rousseff’s Workers’ Party.
Protests in the streets escalated, which worsened the country’s already ailing economy.
In August 2016, Michel Temer was sworn in as Brazil’s new president after the Senate voted to remove DilmaRousseff. Despite his widespread unpopularity among Brazilians, the new president has signaled to implement painful reform measures, in a move to attract foreign investment and buoy economic growth. Temer’s bold reforms include trimming pension benefits and privatizations of state operations from airports to sewage treatment.