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Nov 10, 2017

No more roller coaster ride for Brazilian housing market?


Brazil house pricesHouse prices in Brazil are still falling, but the omens are good.  Increases in construction and home sales, as well as a positive economic outlook, suggest that Brazil's housing market is not too far from recovery.

Brazil’s composite FIPEZAP house price index declined by 0.36% during the year to September 2017, or -2.83% adjusted for inflation. 

Looking back to the boom, 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).   National house prices rose 26.3% in 2011 (18.6% after inflation), by 13.7% in 2012 (7.4% after inflation), by 12.7% in 2013 (6.4% after inflation), and 6.8% in 2014 (0.3% after inflation). 

Property became increasingly unaffordable due to the surge in house prices, leading many Brazilians to rent rather than own.  “In the major cities young professionals are struggling to afford the kind of prices now being asked for properties in good areas,” according to Colordarcy.

Since the end of 2014 national house prices have been falling in real terms.  In 2015 house prices nominally rose 0.9% (but fell 8.9% in real terms).  In 2016 national house prices nominally rose 0.2% (but fell 5.8% in real terms).

During the year to September 2017:

  • In Sao Paulo, Brazil’s biggest real estate market, house prices went up by an average of 1.38% (but fell 1.13% after inflation).
  • In Rio de Janeiro, house prices dropped by 3.58% (and fell 5.96% after inflation), marking its 24th month of year-on-year nominal price declines.

While house prices are clearly still declining in many parts of Brazil, the outlook for the housing market has been improving particularly in the Sao Paulo region. Investors and international buyers are back, searching for bargains.

The reason?  Since October last year, the Central Bank has been cutting its key interest rate, making lending less costly for potential home buyers. As of October 2017 the key rate stands at 7.5%, significantly lower than the 14.25% rate in the first half of 2016.

Q2 2017 saw Brazil's first y-o-y economic expansion, after having shrunk every quarter since Q2 2014 - the country´s worst and longest recession in more than a century. The GDP expansion of 0.3% y-o-y was supported by the rebound in household consumption, which rose by 0.7% y-o-y, also the first increase since 2014.  The Brazilian economy has suffered a deep recession in the last two years, contracting by 3.59% in 2016, and 3.77% in 2015. 

The economy is expected to expand by 0.7% this year, followed by 1.5% growth in 2018, according to the International Monetary Fund (IMF).

The government also expanded the Minha Casa Minha Vida (My House, My Life) program by raising the maximum income of eligible beneficiaries, as well as the price ceiling of housing units. In February 2017, the government allowed almost 30.2 million workers to withdraw amounts deposited in inactive FGTS accounts. Minha Casa Minha Vida allows workers to use their FGTS as deposit for low-income housing, qualifying them for loans from the state-owned bank Caixa Econômica Federal.

As a result, "The residential real estate market in Brazil now is starting to pick up after two years where business was very slow," says Bossa Nova Sotheby’s International Realty broker Sylvia Agricola.

The recovery is helped by the fact that the previous  boom was hardly a "bubble". Brazil´s GDP per capita has increased by a whopping 60% since 2008. 

"A bubble means a lot of increases in prices for nothing," says professor Fabio Gallo.  This was not the situation in Brazil.  "You had real reasons for the expansion of the prices in Brazil."  The 2007 discovery of enormous oil fields located deep beneath a layer of salt in the Atlantic seabed 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 followed legal reforms to streamline the foreclosure process. Plus, interest rates were progressively cut from 26% to 7.25% between 2003 and 2012. The rapid growth of the middle class was another important factor.  All of these elements contributed to the house price boom.

The crisis and its aftermath

Brazil interest rate

Brazil's recent troubles began with the global recession in 2008. To boost the economy, the Central Bank of Brazil slashed its benchmark short-term SELIC rate from 13.75% in December 2008 to 8.75% by July 2009. Brazil wasn’t spared a downturn in 2009, but the economic contraction was minimized at 0.13%. Brazil was swamped with consumer credit from state-controlled banks during Rousseff's first term from 2011 to 2014. There was a surge in wage growth, pushing prices higher. Real GDP growth rates were 7.5% in 2010, 4% in 2011, but then growth fell to 1.9% in 2012, 3% in 2013, and 0.5% in 2014. 

Weak growth was combined with spiraling inflation.   Alarmed, the central bank raised the benchmark interest rate nine times from 7.25% in March 2013 to 11% in April 2014, causing a sharp economic slowdown. After holding the key rate steady for almost seven months, the central bank raised 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.

In June 2013 riots exploded, precipitated by a BRL0.20 (USD0.10) rise in public transport fares, and complaints about excessive spending on mega-sporting events. Brazil is not a poor country. But tax rates are extremely high, yet many Brazilians spend up to four hours per day in traffic jams, either in their cars or on crowded public transport. The protests were an outburst of popular frustration at corruption – a protest against an intolerable situation.

Over the past five years, Brazil’s middle class has felt the pain of prolonged recession. GDP per capita dropped 34.1% between 2011 and 2016, to US$8,727, according to the IMF. During the quarter ending June 2017, nationwide unemployment rate increased to a record 13%, from 11.3% in the same period last year, with about 13.5 million people unemployed according to IBGE.

Brazil gdp per capita

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 were 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, worsening the country’s already ailing economy.  The impeachment of Rousseff began in December 2015. In August 2016 Rousseff was removed from office and Michel Temer was sworn in as Brazil’s new president.

Michel Temer implemented painful reform measures in a move to attract foreign investment and buoy economic growth. Temer’s reforms include trimming pension benefits, and privatizations of state operations from airports to sewage treatment. In December 2016, the senate approved a constitutional amendment, which imposes a cap on public spending for the next 20 years, adjusted annually for inflation.

Corruption controversies swirling around Temer led him to become even more unpopular. His government received a 3.4% approval rating last September in a survey conducted by polling firm MDA, down from 10.3%, in a poll held in February 2017. Temer is expected to end his term of office in December 2018. 

House prices are still declining, but for how much longer?

In 2016 the housing market in greater São Paulo area recorded its weakest performance since 2004. Housing starts were down by 30% y-o-y to almost 27,000 units, while new residential home sales declined by 24% to around 25,000 units in 2016, according to Secovi-SP.

However inflation fell to 2.46% in August 2017, far below the BCB's 4.5% target, giving the central bank flexibility to loosen its monetary policy. In October 2017, Banco Central do Brasil (BCB) reduced its benchmark Selic rate to 7.5%, the central bank's ninth consecutive rate cut since October 2016, when the rate was cut to 14%.

These rate cuts are likely to have a significant effect. Brazil’s original housing boom was mainly propelled by a decline in interest rates, as  successful economic reforms under President Lula da Silva pushed Brazil’s central bank benchmark rate from nearly 30% in 1998, to 8.65% in August 2009.

Now that interest rates are low again the declines in house prices in major Brazilian cities are unlikely to continue.   

Rental yields are moderate

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 de Janeiro being a landlord generates a much less attractive return-on-investment than a few years ago.  In Rio de Janeiro, yields of 3.5% to 4.5% are typical; in Sao Paolo apartment yields are rather higher, between 4% and 6.5%. These are only moderate returns. 

House prices in different regions of Brazil

Belo Horizonte saw a nominal house price increase of around 5% during the year to September 2017 (inflation means these price levels are around 2.5% above 'real' house price rises) according to FIPEZAP. It was followed by Florianópolis (3.4%), Praia Grande (3.3%).  Only these cities had above-inflation house price increases.

Weaker price increases: Vila Velha (1.8%), Curitiba (1.7%), and São Paulo (1.4%), Guarulhos (0.9%), Santos (0.6%), Salvador (0.6%), and Guarujá (0.1%). House prices in other areas such as Recife and Porto Alegre had no significant movement compared to last year.

Declining house prices in nominal terms: Fortaleza saw the biggest house price decline by around 4% during the year to September 2017, followed by Rio de Janeiro (-3.6%), Distrito Federal (-2.7%), Niteroi (-2.6%), Osasco (-2.1), Vitória (-1.4%), São Vicente (-1.4%), Contagem (-1%), Campinas (-0.9%), Goiânia (-0.8%), São Caetano do Sul (-0.7%), Santo André (-0.5%), and São Bernardo do Campo (-0.1%).


  2012 – 2015 2016 (y-o-y) Sep 2017 (y-o-y)
Composite FipeZap HPI 21.4 0.1 -0.4
São Paulo 25.3 0.4 1.4
Rio de Janeiro 22.2 -2.1 -3.6
Belo Horizonte 19.0 4.7 5.0
Distrito Federal 2.3 -1.1 -2.7
Recife 21.4 0.8 0.0
Fortaleza 30.6 0.8 -4.0
Salvador 21.4 2.5 0.6
Santo André 25.6 2.1 -0.5
São Bernardo do Campo 21.8 0.4 -0.1
São Caetano do Sul 22.9 2.3 -0.7
Niteroi 16.3 -1.8 -2.6
Vitória 40.9 3.2 -1.4
Vila Velha 27.4 2.3 1.8
Porto Alegre 22.4 3.2 0.0
Curitiba 40.2 4.8 1.7
Florianópolis 32.7 4.7 3.4
Campinas 30.9 0.7 -0.9
Osasco 24.1 2.0 -2.1
Guarulhos 27.5 0.4 0.9
Santos 21.7 1.0 0.6
Guarujá 22.0 2.5 0.1
São Vicente 23.1 2.0 -1.4
Praia Grande 21.7 1.6 3.3
Goiânia - -2.7 -0.8
Contagem - 1.8 -1.0
Source: FIPE

Real estate activity up; homebuilders optimistic

From January to August 2017, the number of new homes launched rose by 9% to 42,000 units, while home units sold increased by 3.4% to 68,600 homes, according to the Brazilian Association of Real Estate Developers (ABRAINC).  

Housing sales in greater São Paulo area are expected to rise by 5% and sales by 10%, according to Secovi-SP's chief economist Celso Petrucci. Although the country has "extremely high unemployment", MRV Engenharia's co-chief executive Eduardo Fischer Teixeira de Souza says that demand is "so strong that I am able to see growth".

Cyrela Brazil Realty SA, one of Brazil's largest developers, reported that the number of units launched In Q2 2017 rose 13.2% from a year earlier, while sales went up by 35.4%.  There has been an 80% increase in the launches of the Minha Casa Minha Vida project in Q1 2017, according to real estate firm WhereInRio's CEO Frederic Michel Cockenpot.

Brazilian economy exits recession; positive outlook in 2017, 2018

Brazil gdp inflation

Brazil's GDP expanded by 0.3% y-o-y in Q2 2017, after a 0.4% y-o-y contraction the previous quarter, according to the Instituto Brasileiro de Geografia e Estatistica (IBGE).

Due to the higher-than-expected Q2 economic growth, Banco Central do Brasil (BCB) also raised its growth forecast for 2017 from 0.5% to 0.7%, and estimates 2.2% growth in 2018.

"This positive revision mainly reflects GDP’s performance in the second quarter, which was higher than the median of market expectations," noted the central bank. 

Brazil's annual inflation rate slightly rose to 2.54% in September 2017, still below the central bank's 4.5% target.  The country's inflation rate reached an 18-year low rate of 2.46% last August. Inflation is expected to stand at 2.97% by end of 2017, according to a central bank survey.

Brazilian Real slowly regaining value

Brazil exchange rate

The Brazilian Real (BRL) has regained value these past few months.  There was a plunge against the US dollar in May 2017, due to the bribery charges brought against President Michel Temer, but this was a blip in the general pattern of recovery after 5 years of sharp declines in the Brazilian Real. As of October 27, 2017, the exchange rate closed at BRL 3.2689 = US$ 1.

Recent political developments, specifically Congress' refusal to allow President Temer to be put on trial, have boosted market sentiment about the government's capacity to deliver needed reforms. Aside from that, the rise in key commodity prices, and the relatively weak US dollar, have also aided in Brazilian Real's recent gain.

The mortgage market remains weak

Mortgage lending in Brazil grew by at least 25% per year between 2007 and 2014, helped by pro-market reforms under former President Lula da Silva. The first big breakthrough was the introduction of fiduciary alienation, whereby the buyer becomes the owner of the property only after it has been fully paid. The lending institution owns the property while the loan is being repaid. This gives banks security if buyers default (in the past, banks were reluctant to lend, because Brazilian courts are biased in favour of borrowers).

In 2013, mortgage lending grew by more than 30%, reaching a record US$46 billion, with nearly 530,000 properties financed. However outstanding home loans still represent only 8.5% of gross domestic product during the period, or the equivalent of 14% of outstanding bank credit, according to Reuters.

In 2015, mortgage lending slowed sharply, and in 2016 the Brazilian Association of Real Estate Loans and Savings Companies (ABECIP) saw a 38.3% y-o-y decline in loans for acquisition and real estate construction.

The declining trend continued in the first half of 2017, as the credit for purchase and construction of real estate through the Brazilian System of Savings and Loans (SBPE) fell by 9.1% to BRL 20.6 billion (US$ 6.47 billion) as compared to the previous year, according to ABECIP.  

My Home, My Life housing program recovering

The housing program Minha Casa Minha Vida (My House, My Life), launched in March 2009, was one of the popular federal government programs launched during former President Lula da Silva’s 8-year term.  Under the program, subsidized mortgage loans were extended to middle and lower income homebuyers through the state-owned bank, Caixa Economica Federal (CEF). By August 2012, one million houses had been built. Former President Dilma Rousseff announced that by 2014 her administration would have contracted 2.4 million houses. 

However in mid-2015, construction was paralyzed due to lack of public funds. Then in May 2016, the program was temporarily suspended. Then in June 2016, it became a target for spending cuts as the country wrestled with ballooning budget deficit and deep recession.

In February 2017, new rules were implemented for Minha Casa Minha Vida program, which could stimulate construction and increase the number of the program's beneficiaries (the government expects that these new rules will create 600,000 new housing units by end of 2017).

  • the maximum income to qualify for the program was increased from BRL 6,500 (US$ 2,031), to BRL 9,000 (US$ 2,813);
  • the maximum value of unit that can be availed through the program was increased from BRL 225,000 (US$ 70,319), to BRL 240,000 (US$ 75,007).


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