Market in Depth

Brazil's high inflation masks fall

Lalaine C. Delmendo | January 14, 2022

Brazil's high inflation makes it appear that house prices continue to rise. But it's an illusion. In July 2021, Brazil's FIPEZAP house price index rose by 5.13% from a year earlier, its biggest y-o-y nominal increase since April 2015. However when adjusted for inflation, nationwide house prices were actually down by 3.57%.

In August 2021, nationwide inflation surged to 9.68%, the highest reading since February 2016, as the reopening of the economy, coupled with global supply issues, weaker currency and severe drought, pushed up consumer prices. In August 2021, the Central Bank of Brazil raised its benchmark Selic rate by 100 basis points to 5.25%, its fourth consecutive rate hike this year in an effort to rein in inflationary pressures.

The national figure in fact conceals large variations in local house price movements. During the year to July 2021:
  • In São Paulo, house prices rose by an average of 4.45%, the biggest y-o-y rise in six years. However when adjusted for inflation, prices actually declined 4.2%.
  • In Rio de Janeiro, house prices rose by a modest 2.62% but actually fell by 5.88% in real terms. Yet it is important to note that this is actually the city's best performance since June 2015.
  • In Brasilia, house prices rose by a huge 10.12%, which translates to a 1% increase when adjusted for inflation. It was the city's second best showing since in more than nine years.

After slowing last year, property demand has continued its recovery, propelled by the economic recovery which began in 2017.  In May 2021, residential sales in São Paulo reached 5,883 units, up 44.1% from the previous month and by a whopping 144.6% from a year earlier, according to a report released by Secovi-SP. In the first five months of 2021, new residential sales surged 66% y-o-y to 23,098 units.

Obviously Covid has had a large impact.  In 2020, the Brazilian economy contracted by 4.1% from a year earlier, the biggest annual decline in activity since 1990.  However recently, the IMF upgraded its 2021 economic growth forecast for Brazil to 5.3%, from its initial projection of a 3.7% expansion.

Brazil house prices
Foreign individuals and nonresidents may invest in urban and rural properties in Brazil through direct ownership from abroad, or through resident companies or partnerships. To be able to buy a property, a tax registration number from the Cadastro de Pessoa Fisica (CPF) is required.

However there are restrictions on investments in rural properties. Foreign individuals who intend to migrate to Brazil may acquire rural properties directly from abroad only if they come to live in Brazil within three years from the date of acquisition. In addition, rural properties acquired by foreign companies must be destined for the implementation of agricultural, industrial or settlement projects and these activities must be related to the companies' purposes.

Analysis of Brazil Residential Property Market »

Rental Yields

Brazil: rental yields low, prices falling

Prices have begun to move strongly down in Brazil, and in terms of US dollars the downward move is much greater because of the decline of the Brazilian Real by 30% over the past three years, with some recovery since the beginning of 2017.

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.

Unfortunately, this year our researchers were not able collect rents figures, so we rely in this explanation on yields figures from last year.

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Taxes and Costs

Rental income tax can be high in Brazil

Rental Income: Nonresidents earning rental income in Brazil is taxed at a flat rate of 15%.

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%.

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Buying Guide

Total transaction costs are moderate in Brazil

Brazil rio de janeiro propertiesTotal roundtrip transaction costs, i.e., the amount it costs to buy and sell a property, amount to between 9% and 14% of the value of the property. The real estate agents' fee is usually 5% to 6%.

Registration requires no less than 14 separate procedures. The process can be completed in about 47 days.

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Landlord and Tenant

Brazil's landlord and tenant law is pro-landlord

Rents: The initial value of the rent can be freely agreed between the landlord and the tenant under Law 8.245/91, known as Lei do Inquilinato.

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.

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Economy recovering, but unemployment remains high

Brazil’s economy contracted by 4.1% during 2020, following an annual average growth of 1.5% in 2017-19. It was the biggest annual decline since 1990. But economic activity is now recovering strongly, with real GDP rising by 12.4% y-o-y in Q2 2021, the most on record, after the government began lifting some restrictions on non-essential businesses.  Recently, the IMF upgraded its 2021 economic growth forecast for Brazil to 5.3%, from its initial projection of a 3.7% expansion.

During the year to Q2 2021:
  • Industry rose sharply by 17.8%
  • Services rose by 10.8%
  • Fixed investment surged 32.9%
  • Household consumption rose by 10.8%

The recent improvements in vaccine rollouts are expected to boost Q3 activity.

Unemployment remains high. In Q2 2021, nationwide unemployment stood at 14.1%, slightly down from the previous quarter’s 14.7% but still up from the prior year’s 13.3%. From an annual average of 7.7% in 2010-15, jobless rate rose to 12.3% in 2016-20.

There were about 14.44 million unemployed people in Q2.

Since the onset of the pandemic last year, the Brazilian Real (BRL) has weakened sharply. In August 2021, the average monthly exchange rate stood at BRL 5.257 per US dollar, losing more than 23% of its value against the dollar from two years ago.

Brazil gdp inflation
Rising inflationary pressure is another concern. Nationwide inflation rose to 9.68% in August 2021, the highest reading since February 2016, as the reopening of the economy, coupled with global supply issues, weaker currency and severe drought, pushed up prices. Inflation had averaged only 3.5% in 2017-2020, a sharp deceleration from an annual average of 7.1% in 2011-2016.

In August 2021, Banco Central do Brasil’s (BCB) Monetary Policy Committee decided to raise the Selic rate by 100 basis points, the biggest in almost two decades, to 5.25%, in an effort to contain inflationary pressures. It was the fourth consecutive rate hike this year.