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«Is There a Housing Bubble in Brazil?»

Source: Folhapress, via Brasilianas.Org. I translate …

Is there a housing bubble in Brazil? Five indicators for and against

Pro

  1. Housing prices have risen far beyond inflation and the purchasing power of families
  2. The volume of available housing credit jumped from 1.5% of GDP in 2007 to 5.5% in 2012
  3. Interest rates have fallen substantially and homes are financed at favorable interest rates
  4. Purchase prices have risen faster than rents
  5. Government programs, incentives and public works have overheated the market

Con

  1. The rise of a new middle class and a rosy outlook for the future make the rise in prices sustainable
  2. The volume of housing credit is trivial alongside the 65% of GDP in the United States
  3. Brazilian interest rates remain relatively high, inhibiting the expansion of the real estate sector
  4. Rents may rise, compensating real estate prices
  5. The housing deficit in Brazil remains high: 5 million units

The analysis is by the IPEA, the federal government’s Institute of Applied Economic Research. The IPEA

point to the real possibility of a bubble in the Brazilina real estate market which could explode in the event of future interest hikes.

In other words, the rapid rise in housing prices in recent years is resulting in unrealistic valuations, incompatible with real supply and demand and therefore unsustainable.

The study, by economists Mário Jorge Mendonça and Adolfo Sachsida, brings new arguments to bear on the controversy involving researchers, sellers and buyer.

The economists calculate that prices have risen by 165% in Rio de Janeiro and 132% in São Paulo between January 2008 and February 2012, compared with a 25% inflation rate in the same period.

A rise in prices well beyond the rise in inflation was also observeed in Recife, Belo Horiznote, Brasilian and Fortaleza, though the period studied was smaller because historical data was unavailable.

Price bubbles are generally inflated by rapid growth in the supply of credit.

This type of growth is visible in the Brazilian housing sector — impelled, the study makes it a point to say, by federal government programs, incentives and public works.

“The government’s insistence on heating up what is already an overheated real estate market only contributes to a worse overall result,” the study concludes.

Among the examples cited, along with the availability of favorable interest rates, were the Minha Casa, Minha Vida — My House, My Life — housing program and public works relating to the World Cup 2014 and the 2016 Olympics.

An advisory council of the federal presidency, IPEA does not endorse these conclusions. In its bulletin, the institute argues that the volume of available credit is a long, long way from the 65% of GDP observed in the United States.

We can only speak for our own modest microcosm, here on the modest little street in the Vila Madalena-Sumarezinho where we live: There is a temptation to sell into peak prices which have increased literally six-fold (in theory) in the past decade.

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