Brazilian housing market is recovering
Maria de Guzman | April 29, 2019
For the first time since July 2017, nominal house prices were up, as Brazil´s FIPEZAP house price index slightly rose by 0.07% during the year to February 2019. But as we often remind readers, nominal house prices are not 'real', and house prices fell by 3.68% when adjusted for inflation.
During the year to February 2019:
- In Sao Paulo, Brazil´s biggest real estate market, house prices went up by an average of 2.02%. However, when adjusted for inflation, prices were actually down by 1.8%.
- In Rio de Janeiro, house prices fell by almost 3% (-6.62% inflation-adjusted), its fourth consecutive year of y-o-y nominal price declines.
Real estate agents, as well as analysts from related sectors, mostly expect a better performance from the real estate sector this year.
"Our expectations are very positive for the Brazilian property market as a whole," said Lopes Immobilis' agent Ricardo Bezerra.
A new real estate cycle is beginning, now that uncertainties have been reduced by the elections, says Eduardo Fischer Teixeira de Souza, MRV president of Engenharia.
"In this sector, we must always try to anticipate the next three years. Even in 2014, when unemployment was low, it was already apparent that there would be difficult years ahead, but 2019 should be better for the real estate market. The worst of the crisis seems to have passed and the demand for housing is high," said Fischer Teixeira de Souza in an interview with the newspaper O Estado de S. Paulo.
"Construction GDP is negative but recovering. The indicators are far from the peak, but many return to the levels before the market boom, which is a sign of improvement," says Brazilian Association of Real Estate Loans and Savings Companies (ABECIP) President Gilberto Duarte de Abreu Filho.
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.
Economic recovery continues; positive outlook in 2019The Brazilian economy continued to recover for a second year, expanding by 1.1% in 2018, according to the Instituto Brasileiro de Geografia e Estatistica (IBGE).
Growth was mainly supported by household consumption (up by 1.9% y-o-y in 2018), driven by higher real wages and increased household credit, according to the Banco Central do Brasil (BCB).
The BCB forecasts 2% growth for 2019, and predicts 2.8% growth in 2020.
"The recent evolution of consumers and entrepreneurs confidence indicators and the improvement in financial conditions, highlighted by the trajectory of market indicators, continue to signal a favorable environment to the continuity of the economic recovery cycle," the central bank noted.
Brazil's annual inflation rate rose to 4.58% in March 2019, an increase from 3.9% in the previous month, higher than the central bank's 4.25% target for 2019. Based on the central bank's focus survey, inflation is forecast to be at 3.89% be end of 2019.
The crisis and its aftermath; Bolsonaro succeeds Temer
Brazil´s recent troubles began with the global recession in 2008. To boost the economy, the Central Bank of Brazil slashed the benchmark SELIC rate from 13.75% in December 2008 to 8.75% by July 2009.
Brazil was swamped with consumer credit, and there was a surge in inflation. Even so GDP growth fell to 1.9% in 2012, 3% in 2013, and 0.5% in 2014.
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.
Alarmed at the inflation the central bank raised the benchmark interest rate nine times from 7.25% in March 2013 to 14.25% in 2015, the highest level for almost six years.
GDP per capita fell 31.1% between 2011 and 2018, to US$9,126, according to the IMF. In 2018, nationwide unemployment remains high at 12.3% in 2018, although slightly down from 12.7% in the previous year, with about 12.8 million people unemployed according to IBGE.
Then came the corruption scandal involving oil giant Petrobras and the country´s largest engineering and construction firms. 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 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 in September 2017 in a survey conducted by polling firm MDA, down from 10.3% in a poll held in February 2017. After his term of office ended in December 2018, Temer was arrested in March 2019 on corruption and money laundering charges.
The general election of October 2018 was won by far-right candidate Jair Bolsonaro with a 55% share of total votes during the second round, beating Worker's Party's (PT) candidate Fernando Haddad, who got a 45% share. Bolonaro was sworn into office on January 1, 2019.
Bolsonaro supports privatization of public-owned enterprises, public spending cuts and lower taxes, but has very worrying anti-environmentalist and anti-human rights views.
After plunging to a record-low in September 2018, the Brazilian Real (BRL) has showed signs of improvement.
The currency's depreciation in 2018 was partly due to political uncertainty prior to the October 2018 Presidential Elections, and to international factors that cannot be controlled by the government.
The Brazilian Real opened 2019 with a stronger performance, brought by market optimism over President Jair Bolsonaro's government and its proposed economic reforms. In April 12, 2019, the exchange rate closed at BRL 3.8802 = US$ 1.