Rising demand and supply
Lalaine C. Delmendo | February 10, 2022
Brazil's housing market is now showing signs of improvement, buoyed by rising property demand and supply. In November 2022, Brazil's FIPEZAP house price index rose by 6.34% from a year earlier, up from y-o-y increases of 5.29% in 2021, 3.67% in 2020, and zero growth in 2019, according to figures released by Fundação Instituto de Pesquisas Econômicas (FIPE). The past two months had been its biggest y-o-y price growth since December 2014.However when adjusted for inflation, nationwide house prices rose by a meager 0.42% over the same period.
The national figure in fact conceals large variations in local house price movements. During the year to November 2022:
- In São Paulo, house prices rose by an average of 5.19%, the biggest y-o-y rise in more than seven years. However when adjusted for inflation, prices actually declined slightly by 0.68%.
- In Rio de Janeiro, house prices rose by a modest 2.33% but actually fell by 3.37% in real terms. Yet it is important to note that the city's y-o-y house price growth has never exceeded 3% since early-2015.
- In Brasilia, house prices rose by a modest 2.38%, but actually declined by 3.32% when adjusted for inflation. It was a sharp deceleration from y-o-y increases of 8.66% in November 2021 and 9.05% in November 2020.
Residential sales and construction activity are rising. In the first three quarters of 2022, the total number of residential sales in São Paulo rose by 7.9% y-o-y to 50,728 units and launches increased by 4.3% to 51,715 units, according to Secovi-SP.
There is also a renewed interest by foreign investors on Brazilian real properties recently, which is expected to boost the housing market further in 2023. 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.
The wider economy continues to expand, albeit at a much slower pace. During 2022, the Brazilian economy is estimated to have expanded by a modest 2.8%, a slowdown from its 2021 growth of 4.6%, based on figures from the International Monetary Fund (IMF).
Analysis
of Brazil Residential Property Market »
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.
Economy continues to grow, unemployment falling
Brazil’s economy advanced by 3.6% y-o-y in Q3 2022, following annual growth rates of 3.7% in Q2 and 2.4% in Q1, according to the Instituto Brasileiro de Geografia e Estatística (IBGE). It was the seventh consecutive quarter of y-o-y growth. Over the same period:- Private consumption rose by 4.6%
- Government spending rose by 1%
- Gross fixed capital formation was up 5%
- For net exports, exports increased 8.1% while imports grew 10.6%
On a seasonally-adjusted quarterly basis, real GDP increased slightly by 0.4% in Q3 2022, following expansions of 1.% in Q2 and 1.3% in Q1.
The Brazilian economy is estimated to have expanded by a modest 2.8% during 2022, a slowdown from its 2021 growth of 4.6%, based on figures from the International Monetary Fund (IMF).
Labour market conditions continue to improve. Nationwide unemployment dropped to 8.3% in the quarter ended October 2022, the lowest level in about seven years. From an annual average of 7.7% in 2010-15, jobless rate rose to 12.6% in 2016-21.
There were about 9 million unemployed people in Brazil in October 2022 – the lowest since 2015.
Inflation eased to 5.97% in November 2022, after reaching a 19-year peak of 12.47% in April 2022, after the central bank hiked its benchmark Selic rate several times to rein in inflationary pressures.
Since the onset of the pandemic, the Brazilian Real (BRL) has weakened sharply. In December 2022, the average monthly exchange rate stood at BRL 5.2478 per US dollar, losing nearly 22% of its value against the dollar from three years ago.