No more roller coaster ride for Brazilian housing market?
November 10, 2017
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.
Foreign individuals and nonresidents may invest in urban and rural properties 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 several 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 shall be destined for the implementation of agricultural, industrial or settlement projects and these activities must be related to the companies' purposes.
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.
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%.
Total transaction costs are moderate in Brazil
Total 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.
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.
Brazilian economy exits recession; positive outlook in 2017, 2018Brazil'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.
The crisis and its aftermath
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$8,727, according to the IMF. During the quarter ending June 2017, nationwide unemployment rate increased to a record 13%, from 11.3% in the same period last year, with about 13.5 million people unemployed according to IBGE.
Then came the corruption scandal involving oil giant Petrobras and the country’s largest engineering and construction firms. Several executives from Brazil’s top builders were indicted for the multibillion-dollar kickback scheme uncovered at Petrobas, while the investigation has implicated politicians, mostly from President Rousseff’s Workers’ Party.
Protests in the streets escalated, worsening the country’s already ailing economy. The impeachment of Rousseff began in December 2015. In August 2016 Rousseff was removed from office and Michel Temer was sworn in as Brazil’s new president.
Michel Temer implemented painful reform measures in a move to attract foreign investment and buoy economic growth. Temer’s reforms include trimming pension benefits, and privatizations of state operations from airports to sewage treatment. In December 2016, the senate approved a constitutional amendment, which imposes a cap on public spending for the next 20 years, adjusted annually for inflation.
Corruption controversies swirling around Temer led him to become even more unpopular. His government received a 3.4% approval rating last September in a survey conducted by polling firm MDA, down from 10.3%, in a poll held in February 2017. Temer is expected to end his term of office in December 2018.
The Brazilian Real (BRL) has regained value these past few months. There was a plunge against the US dollar in May 2017, due to the bribery charges brought against President Michel Temer, but this was a blip in the general pattern of recovery after 5 years of sharp declines in the Brazilian Real. As of October 27, 2017, the exchange rate closed at BRL 3.2689 = US$ 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.