GDP growth in Brazil has been very strong but slowed from 7.5% in 2010 to 2.7% in 2011 and just 0.9% in 2012, partly the result of its reliance on shrinking North American markets.

Oxford Economics forecast a return to strong growth, 2.9% in 2013 and 4.4% in 2014, fuelled by strong consumer spending and infrastructure investment as well as the contribution of the petro-economy, part of which is centred on Macaé, 180 kilometres east of Rio de Janeiro.

Over half of Brazil’s GDP is generated in the south east of the country. The cities of São Paulo and Rio de Janeiro account for 25% of GDP creation but contain just 10% of the country’s population. This means that the pressures of urbanisation, and the strength of housing markets, are greatest in this region. (Click on map below to enlarge)

Brazil’s economy is growing at a much faster rate than the established economies of the US and Eurozone. Brazil is exceptional among many expanding economies in having natural resources to support this growth, including fresh water supplies. It is forecast to outperform the rest of Latin America, although it still falls short of China (Graph 1).

Socio-economics

Around 30 million Brazilians joined the middle class between 2000 and 2011, resulting in a boom in domestic consumption. Household expenditure increased by 200% in the decade to 2011, fuelled by a rapid growth in consumer and mortgage debt.

A poverty reduction program has led to real average incomes rising by 9% from 2002 to 2012, according to the Instituto Brasileiro de Geografia e Estatística (IBGE).

In 2011, 54% of Brazilians were middle class, up from 34% in 2004, according to Cetelem BGN and Ipsos Social Research Institute – a total of 103 million middle class Brazilians, who account for 46% of the country’s purchasing power. It is predicted that around 60% of Brazilians will be middle class by 2018. As a consequence, some residential property developers are shifting from the luxury sector to the mid-market in anticipation of this trend.

The rapidly expanding Brazilian middle class is replacing wealthy international buyers who used to dominate the market in major cities like São Paulo and Rio de Janeiro. Those international buyers that are present are typically Europeans or those from elsewhere in the Americas.

Housing market impacts

It is hardly surprising that economic growth and wealth creation has resulted in a booming housing market, particularly as mortgage availability has increased and credit conditions have eased greatly.

Long-term lending in Brazil was traditionally very scarce due to the very high inflation rates prevailing until quite recently. Mortgage lending used to be restricted to the housing finance loans granted by the Housing Finance System (SFH).

The economic stabilisation process implemented with the Plano Real, in July 1994, enabled the development of new sources of financing for the real estate sector, as well as the implementation of a secondary mortgage market in Brazil. This increased mortgage availability and reduced its cost.

Brazil has also historically had very high mortgage rates. As short a time ago as 2002, base interest rates were well over 20% and so mortgaged owner-occupation used to remain rare and housing market gearing has only increased relatively slowly.

Successful economic reforms over the past several years have now pushed Brazil’s central bank benchmark rate (Selic), from a recent high of 26% in 2003 to just over 7% today. Private mortgage rates have followed suit and currently stand at around 10 to 12% (interest rates on government mortgages are nearer 8%), which may be considered high by international standards but is low by Brazilian historic standards.

This is a major factor influencing the appetite for geared real estate purchase as previously finance rates were higher than the rental return or opportunity cost of housing.

The central bank has recently increased the benchmark interest rate slightly as inflation in the country was running at 6.59%, which is above the ceiling of the country’s 2.5% to 6.5% inflation target range. Despite this, the high inflation rate means that real (inflation adjusted) mortgage interest rates are now lower than they have ever been in Brazil’s recent history, making mortgage borrowing a more attractive proposition.

The lack of tradition for owner-occupation and real estate investment generally has had repercussions on housing purchases. It is only recently that many Brazilians, in common with other South Americans, have sought to invest in real estate and especially to venture into overseas real estate markets.

It is, broadly, North American cities like Miami, New York and Los Angeles that have seen any significant activity from this region in their real estate markets. For example, wealthy Brazilians were the second biggest investors in Florida residential real estate behind Canadians in 2012.

Taken from
Spotlight: Brazil Residential Property Market