Brazil’s speculation fever shows no sign of easing
By Jonathan Wheatley in São Paulo
Published: August 24 2010 17:46 | Last updated: August 24 2010 17:46
Depending on where you look, Brazil’s property market is one facing a long future of stable growth; or it is a fast-inflating bubble ready to burst.
Take Luiz Eduardo Perreira, a treasurer with a multinational company in São Paulo. Like many moderately wealthy Brazilians, Mr Perreira (not his real name) got into property speculation by accident.
EDITOR’S CHOICE
FT series: Global property - Aug-19beyondbrics: Brazilian treadmills - Aug-24Global house prices: The peaks and troughs - Aug-16Three years ago he bought a new, 200 square metre apartment for him and his family in a smart area of São Paulo for R$700,000. He bought it “on the plan” – before construction began and takes delivery of the keys this month. There is just one thing: the flat is now worth R$1.4m ($789,000, £511,000, €623,000).
“It gives you a real itch,” he says. “You want to sell it and go rent somewhere.”
Rather than flip the family home, however, he made a second investment.
“Whenever people get together in a bar, this is what they talk about. It’s like a fever,” he says. He and some friends invested in an office building at the “pre-launch” stage, when developers secure initial capital before showing their project to a wider market. Mr Perreira put in R$600,000 in May 2009, paying R$6,300 a square metre.
“My target was to reach R$11,000 per square metre after three years,” he says – a target he had overtaken after 14 months.
“My view is, this is obviously a bubble,” he says. “The only reason I haven’t sold is because banks are still lending and people are still buying. As soon as credit starts to dry up, I’m out.”
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Luiz Paulo Pompéia of Embraesp, a property market consultancy in São Paulo, agrees.
“This is a very heated market,” he says. “Buyers are euphoric and developers are taking advantage of that.”
He says many investors, including foreigners, are buying properties today betting that prices will go on rising. “We just don’t know if this will be the case,” he says.
But while many people expect Brazil’s higher-end property prices to peak soon, very few foresee the kind of collapse seen in the subprime crisis in the US.
This is because Brazilians have a much bigger stake in their properties than is common in more developed markets, as Wilson Amaral, chief executive of Gafisa, one of Brazil’s biggest homebuilders, explains.
“When people buy on the plan, they give us 6 per cent over three months as a downpayment. Then they make monthly payments to Gafisa during construction, so when they take delivery two and a half years later they will have paid 25 to 30 per cent of the final cost.” Thereafter, homebuyers go to high street banks for a mortgage, typically at about 12 per cent annual interest. Because the property provides security for a loan of 70 to 75 per cent of its value, prices would have to fall a long way before buyers were caught in the “negative equity” trap.
So while today’s speculators may not make the killings they hope for, they are unlikely to trigger a collapse in the market.
This applies even more at the lower end of the market where the real volume is and where Brazil’s homebuilders, initially focused on the higher end, are increasingly concentrating their attention.
Here, the story is one of huge demand that developers and banks will find it hard to meet.
Mr Amaral – whose company recently took over Tenda, a homebuilder aimed at buyers earning from R$1,000 to R$4,000 a month – says Brazil must build 1.6m homes every year just to cope with families entering the market, without addressing the country’s estimated shortage of about 5m homes. “If Brazil goes on growing at 5 to 6 per cent a year, with salaries rising above inflation, with young people entering the job market, with more formal [rather than informal] jobs being created?.?.?.?demand will go on rising at current levels for the next 20 years,” he says.
Banks have traditionally been reluctant to lend to homebuyers and mortgage lending is only about 4 per cent of gross domestic product in Brazil – very low by international standards but about double what it was three years ago.
Banks have been drawn into the market by recent legislation making it easier to foreclose on defaulters. They are also obliged to dedicate 65 per cent of deposits in savings accounts to mortgage lending, though many remain below that level.
Once they get comfortably above it, Mr Amaral predicts, they will start ploughing the excess back into mortgages through securitisation, something still in its infancy in Brazil – and which could also increase systemic risk.
Meanwhile, the focus is on meeting demand. A government programme will pour R$60bn into Brazil’s low-end housing market through often heavily subsidised loans. Launched in 2009, it aims to build 400,000 homes for families earning up to R$1,395 a month by 2011.
Buyers at this end of the market are much more price sensitive and prices have been rising much more slowly. It will be a long time before Brazil’s low wage earners become property speculators. |
