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Brazilian housing bubble begins to deflate

Rise in home prices in 16 cities slips for the sixth consecutive month

An aerial view of downtown São Paulo.
An aerial view of downtown São Paulo.BOSCO MARTÍN

Real estate prices in Brazil’s major cities are pointing to a slowing of the country’s housing market. The price index of homes put up for sale online showed that the annual increase in the price per square meter slipped for the sixth month running in May. This information broadens the already heated discussion about whether Brazil is experiencing a housing bubble, which may now be deflating, even before it reaches maximum capacity.

FipeZap Ampliado Index, an agency that monitors apartment prices online in 16 Brazilian cities, says house prices have risen by 3 percent since the beginning of the year. The expectation is that overall inflation will rise by more than 3 percent in the same period. According to the report, the fact that the change in house prices is less than actual inflation in Brazil is causing “a real decline in the value of homes.” The Central Bank of Brazil projected a 0.45 percent increase in inflation in May after prices had climbed by 2.86 percent from January to April.

“Everyone thinks that if there is a bubble it will explode,” says William Eid Júnior, a finance professor at the Getulio Vargas Foundation (FGV). “But it could happen bit by bit. Prices are clearly dropping after skyrocketing in the last few years.”

Everyone thinks that if there is a bubble it will explode. But it could happen bit by bit”

Rio de Janeiro, where one square meter costs 10,609 reales ($4,700), has the highest house prices in the country, followed by Brasilia (8,136 reales, $3,600) and São Paulo (8,060 reales, $3,565). Between 2008 and April 2014 house prices rose 252% in Rio and 203% in São Paulo, figures that have even caught the attention of Nobel Prize-winning economist Robert Shiller, who predicted the collapse of the sector in the United States in 2008.

But unlike the American boom, Brazil’s housing bubble rests on real estate prices and not on access to credit. Loans to homeowners represent 10% of Brazil’s Gross Domestic Product (GDP) while in the United States they accounted for 76.1% in 2011. Credit for home purchases were worth 80% of GDP in the United Kingdom.

According to Otto Nogami, economist and professor at the Insper Institute, the fact that more homes are up for sale or rent is not a sign of a housing crisis: “The market tends to adjust itself. It’s hard to believe that prices could drop down to the level they were at before the boom. They will end up somewhere in between.”

Between 2008 and April 2014 house prices rose 252% in Rio and 203% in São Paulo

These indices are based on homes advertised for sale on the internet and do not take into account possible discounts or sudden mark-ups at the time of actual sale. Some economists do not have confidence in them and they do not rely on them to make projections about the industry. Other published sources, however, have corroborated the reports. The real estate business association for residential and commercial buildings in São Paulo says its members sold 3,755 units between January and March, 45% fewer than they did in the first trimester of 2013.

Dwindling sales could also be the result of inflation and the uncertainties over the economy. “The market needs to boost sales to 30,000 units or more per year in order to contribute to the country’s economic recovery,” says Claudio Bernardes, the real estate business group’s president.

The construction sector also fell by 2.3% in the first trimester of 2014.

Translation: Dyane Jean François

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