Brazil’s housing carnival stokes bubble worries

Listening to Jose Carlos de Vasconcellos talk about Rio de Janeiro’s property market is like being transported back to the bubble days in the US or Europe.

The 60-year-old, who came out of retirement to join Brazil’s swelling ranks of real estate brokers, is convinced that property in the beachside city is a one-way bet despite a near doubling of house prices in just three years.

“I’m confident that the market isn’t going to slow down any time soon,” he said, taking a break from his afternoon class at a Rio school for real estate brokers.

“I don’t see any investment that’s as good as property.”

Burned property investors elsewhere may beg to differ, but Vasconcellos is typical of the blissful optimism that has infused Brazil’s real estate market at a time when property in much of the developed world remains buried in sour debts.

Rio, boasting picture-postcard scenery and plans for big investments ahead of the soccer World Cup in 2014 and the Olympic Games two years later, is not alone in a Brazilian housing boom that is inevitably raising fears of an asset bubble in one of the world’s hottest emerging markets.

Since early 2008 – just as the credit crunch was biting in the developed world – residential property prices in Rio have risen 99 percent with Sao Paulo not far behind on 81 percent, according to a newly launched index by Brazil’s Fipe economic research institute.

Brazil lacks an official gauge of national house prices, but there have been similar booms in other major cities, including the capital Brasilia and coastal cities in the northeast such as Recife and Salvador.

Fever
Americans and Europeans would recognise many of the symptoms of Brazil’s property fever.

Apartment prices are popular dinner table – and beach – conversation in Rio, anecdotes of humble doormen and taxi drivers becoming real estate brokers are common, as are stories of people snapping up apartments without seeing them.

Rio’s swankier addresses, such as beachside Leblon or Ipanema, are catching up with the eye-watering prices of Manhattan and central London with three-bedroom apartments changing hands for 2 million reais ($1.2m) or more. One fairly average-looking two-bed apartment in Leblon a block from the beach is currently on the market for 2.45 million reais.

Rio’s central business area has overtaken Manhattan’s Midtown district to become the world’s fourth most expensive city to rent office space, behind only Hong Kong, London and Tokyo, according to global real estate group Cushman & Wakefield.

Demand for places on training courses to become real estate brokers is booming. Just over 3,300 new brokers were registered in Rio state last year, a nearly ten-fold increase from 2005.

Just as in China, another fast-growing emerging market where some worry about a property bubble, there is plenty of evidence that the boom is well-founded.

Brazil’s economy grew a sizzling 7.5 percent last year, driven by record-high employment and confident consumers who are swelling the middle class and eager to get a foot on the housing ladder, often with the help of credit.

Millions had for long been locked out of owning property because of a lack of financing, but the mortgage market is now growing rapidly on the back of unprecedented economic stability, bringing home ownership into reach.

With a national housing deficit estimated at more than seven million units, there is plenty of pent-up demand.

“The boom is real. We don’t have any bubble and there’s not a chance of one because the percentage of GDP (of mortgage debt) is very low and the lower classes have been left out of this market for many years,” said Joao Paulo Matos, the director of Carmo e Calcada, a Rio civil construction firm.

“The World Cup and the Olympics are bringing more companies and industries here and their employees need somewhere to live, from low-level workers to executives.”

Three buildings with a total of 821 apartments that the firm launched last year sold out in the first week, one of them in a single day. Matos’ main worry is a shortage of qualified labour and materials to meet the insatiable demand for new projects, most of which are in the Barra da Tijuca beach zone west of Rio where the bulk of Olympic events will take place.

Major builders such as Rossi Residencial, Cyrela and Gafisa have been among the biggest gainers on Brazil’s stock market in the past two years, backed by a $41bn government low-income housing program.

Property cassandras
Mortgage debt in Brazil is indeed relatively low, standing at about 4 percent of GDP compared to about 15 percent in China in 2009, and much higher levels in developed economies. Brazilian banks have stricter standards too, generally lending no more than 80 percent of a property’s value.

High mortgage rates also act as a sobering force, although they are now low by Brazil’s historical standards.
Banco do Brasil, whose mortgage portfolio has more than doubled to 4 billion reais in the past year, offers 30-year home loans at a 13 percent fixed annual interest rate, almost triple the current rates in the US.

The majority of economists agree with Matos, but there are a growing number of skeptics who, on Portuguese-language sites like bolhaimobiliaria.com, vent their view that Brazil’s boom is doomed to a familiar fate.

Mortgage debt may be low, skeptics say, but the overall consumer debt burden has been growing fast when taking into account credit cards and installment payments that carry average annual interest rates of around 30 percent.

The explosion of credit in recent years has raised concern that Brazil is nurturing a new breed of subprime consumers who are not financially astute enough to manage their debts and who could default as the economy cools and interest rates rise.

That is exactly the scenario Latin America’s largest economy faces this year.

“It’s like putting someone who has never eaten in front of a banquet. They will get ill from eating too much,” said Heitor Mello Peixoto, the head of eyesonfuture, a Sao Paulo business consultancy.

Peixoto, who believes a bubble is forming, worries that banks aren’t monitoring the amount that mortgage holders are spending on maintaining their other debts.

Household debt costs stand at around 22 percent of income in Brazil, according to Sao Paulo consultancy LCA Consultores, compared to 15 percent in the US at the end of 2010.

“I received an offer of credit from my bank much higher than I could afford because they worked it out from my income, not from what I spend,” Peixoto said.

Matos has noticed that more of his apartments are being bought by investors these days, accounting for 40-45 percent of sales, rather than by families who want a permanent home.

Still, his firm plans no let up in the pace of construction this year, expecting to build 1,200 units for total sales of around 300 million reais, up from 200 million reais in 2010.

Judging by the packed, enthusiastic class of real estate brokers, there will be no shortage of help to sell them.

“(Rio) has everything – beaches, sun and business all together and there’s not much more room to build. However much prices go up, there will always be people wanting to buy,” said Carmen Garcia, a 49-year-old student.