Brazil is at the end of a cycle
Last Updated: October 01, 2014
Brazil’s composite FIPEZAP house price index registered its lowest year-on-year nominal price rise since data became available, with 4.49% year-on-year (y-o-y) price rise in May 2015. This is well below the 7.6% y-o-y inflation rate for the same month, so housing values aren’t keeping pace with inflation. In real terms house prices fell 3.65%, after adjustment for inflation. Average price growth has been slowing down from 18.7% in 2012, 12.3% in 2013, down to 10.2% in 2014.
- In Sao Paulo, house prices had risen by an average of 11.3% (4.7% inflation-adjusted), the lowest year-on-year rise since 2008. House prices in Sao Paulo increased 14.1% in 2013, 20.5% in 2012, 27.1% in 2011, and 22.2% in 2010.
- In Rio de Janeiro, house prices had increased by an average of 12.0% (5.3% inflation-adjusted), far lower than the 41.3% y-o-y rise seen in 2011.
Since then house-price rises have slowed most in the cities where they had risen most, like São Paulo and Rio de Janeiro.
House prices in São Paulo rose by an amazing 223.5% from January 2008 to May 2015 (107.8% inflation-adjusted), and in Rio de Janeiro house prices rose by an even more spectacular 266.1% (135.2% inflation-adjusted).
However, there has been a noticeable slowing down of property price rises in the past couple of years. And the price correction is expected to continue as the country contends with high inflation and weak growth, compounded by the depreciation of the real.
Yet despite the sluggish economy and weak sales, analysts expect the Brazilian property market to remain resilient in 2015 – mainly driven by government investment in social housing, strong job creation and the Rio de Janeiro 2016 Olympics. According to the Sao Paulo construction association (Secovi-SP), the market in Brazil’s financial capital has generally been slow. New-build launches had dropped by 16% in 2014. But there was a marked improvement in sales activity in November-December. Imoconnect, one of Brazil’s largest nationwide property networks, also expressed optimism for 2015, reporting a 45% increase in sales in the third quarter of 2014.
“Good news remains thin on the ground in Brazil but we take some comfort from the fact that the country's frothy housing market has so far managed to avoid a hard landing. It's still early days but the initial signs are that Brazil's housing bubble is deflating via a gradual moderation in prices rather than via a sharp and sudden drop in prices that can cause steep falls in household wealth and destabilize the financial system,” said Neil Shearing of Capital Economics.
Brazil: very strong upward price trend for any and all apartment in Rio, and for smaller Sao Paulo apartments
Prices have continued to move strongly upward in Brazil in terms of US dollars, in defiance of widespread worries that the Brazilian property market may be becoming overheated.
In Rio de Janeiro, the price movement was strongest, with apartments moving up in price an amazing average of 48%, from an average of US$3,429 per sq. m., to US$5,094. Rio penthouses moved up by less, and apartments in Barra da Tijuca hardly moved up at all.
In Sao Paolo, the prices of 50 sq mt apartments moved up 33% during the year, to US$3,384 per sq. mt; apartments of 120 sq mt moved up 10.5% to US$2,616 per sq. mt. Sao Paolo apartment prices moved strongly up across all size ranges, except for the largest apartment sizes (200+ sq mt).
During this past year, the Real moved 3% up against the US$ (a relevant fact, as we measure real estate prices in US$). Sao Paolo penthouses moved up across the size range, with 120 sq. mt. apartments moving up 37%.
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.
Brazil: Weakening economy, high inflationBrazil’s economy grew a meagre 0.1% in 2014, after real GDP growth rates of 2.7% in 2013, 1.8% in 2012, 3.9% in 2011, and 7.6% in 2010, according to the Central Bank. Brazilian GDP is expected to actually decline by 1.1% this year, as the central bank has signaled it will continue to raise the Selic rate to curb inflation.
Weak economic growth and rising interest rates are two factors which, in almost any economy, can be predicted to hit house prices.
Brazil’s economy is facing a double whammy of rising prices and sluggish growth. The Central Bank, in its recent quarterly report, estimates that gross domestic product (GDP) will contract by 1.1% in 2015. The bank’s inflation outlook, on the other hand, has been raised from 7.9% to 9.0%.
This deadly combination of rising prices and slow growth is undermining the economy, the result of President Dilma Rousseff wrongly pursuing expansionary and populist policies in the aftermath of the global recession. To boost the economy, a tax relief program was introduced, along with subsidies and protection for industry, increased social welfare benefits for low-income earners and enormous infrastructure programs.
The Central Bank of Brazil also slashed its benchmark short-term SELIC rate from 13.75% in December 2008 to 8.75% by July 2009. Brazil was swamped with consumer credit from state-controlled banks during her first term, from 2011 through 2014. These resulted in a surge in wage growth, pushing prices higher. But while wage growth has since slowed, prices have continued to rise, leaving the Central Bank unable to decrease interest rates as it tries to curb inflation today.
In 2014, GDP grew by a paltry 0.1%, the slowest since 2009. Inflation, meanwhile, is mounting at 8.1% in June, the highest it’s been since 2003. The country’s benchmark interest rate has also escalated, with Brazil’s central bank raising it to a six-year high of 13.75% in the same month.
Brazil’s economy grew by an average of 4.3% from 2004 to 2006 and then by an average of 5.6% during 2007 and 2008. Brazil wasn’t spared in 2009, but the economic contraction was minimized at 0.3%. Real GDP growth rates were 7.5% in 2010 and 2.7% in 2011, despite the adverse impact of the Eurozone debt crisis.
Real sinks to 10-year low, crisis scenario?
Brazil’s real has plunged as crude oil prices - the country’s major export - continue to fall. There is also concern that the country could lose its investment-grade credit rating. Also, if the US Federal Reserve raises interest rates, that could dampen demand for high-yielding emerging market assets.
The currency has lost 27% over the past year, the most among 16 major currencies tracked by Bloomberg. The real approached a 10-year low of 3.2282 on July 08. Net overseas holdings of future contracts betting against the real has risen to a record USD 36.5 billion. Brazil sold the equivalent of USD 97.9 million of currency swaps and rolled over contracts worth USD 631 million to support the currency and limit import price increases.