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February 25, 2011

Comments

Ray Adkins

I am not so concerned about the accelated consupmtion in Brazil. However I see a huge risk on the outrageous and senseless real state speculation that is going on in every part of the country.

Rachel

The value of my apartment has almost doubled in almost 3 yrs. It is insane in Rio right now. For my sake, I hope it doesn't burst, just levels off.

Henrique

Rachel. It's cyclical. It will burst when some crisis comes up, but it falls like 30% to grow more 60% right afterwards. Real estate is still a great investment in Brazil because it doesn't lose value in the long term, from Brazilian experience. In time, a subprime crisis is not likely to happen here because not everyone can take a loan and they're not affordable as in the US. Banks here make a lot of money on extremely high rates and they're not likely to break unless rates go down to almost 0% like in the US. Again, that's not happening because that'd make inflation even higher and the government's main tool to control inflation is the rate itself, so, Financial Times knows about finances, but still, Brazil is not for beginners. The inflation goals are linked to an "ever-crisis" policy, which means Brazil is always in crisis, even now. The reason rates are still so high here is to offset public debt, but that's also going down (went down 1/3 on Lula's 2nd term). Perhaps in the future, consumer goods will be more affordable. The good part is knowing that whenever a crisis hits Brazil, the government has a lot of "fat" to burn in case it's needed and they have shown they know how to do it.
Unlike Japanese, Brazilians spend whatever is the price and that's why this macroeconomic logic works here. It just doesn't make sense to pay 2000 reais for a usd 500 computer. but we do. or how about spending USD 25000 on a car that's not even new? we do! had we had the chance to know how it's like to pay 18,000 for a sonata, we'd miss that and riot. but u don't miss what u never had and, because brazil is still an "island", low-searched tourist destination and maintains very high import duties, people here will be happy to buy whatever, just because they feel they can pay the "prestação" (monthly fee).

Ray Adkins

Rachel,

Sell now and you could probably buy a couple apartaments in the US and then when the real state bubble pops in Brazil you sell in the US and buy 4 in Rio! :)

Ray Adkins

Rachel,

I am just kidding. Rio has some special factors going on right now that justify a price hike...so even if there is a bubble in Rio it shouldn't be too bad.

Ray Adkins

Henrique,

How do you explain real state prices that keep going up without any solid justification, salaries and income are not going up how can prices keep rising? Do you see an end ever? or will people pay 1 million Reais for a one bedroom apartment in Rio just because they don't know how much an apartment costs in Dallas?
Sorry, I can't follow your logic...
How can real state prices keep rising out of control?


Rio Gringa

@Henrique I'm going to take this opportunity again to ask if you're interested in writing a guest post : )

Henrique

Rachel,

Thank you. I'll think about it... :)

Ray,

As a matter of fact, they do have a solid justification. It's called scruple. Which is non-existent in capitalism, therefore, it happens not only here, it happens everywhere. It's just that Brazilians embrace an opportunity more fiercely than others when it comes to making money. It's not savvy, It's swindle, "malandragem", "jeitinho". The only people who could stop it are the buyers, but the buyers are not caring apparently and behave in a haste - feeding yet more the acceleration of increases -, so people are testing the limits. That's my view... It's not that it's out of control here. It's out of control everywhere!

Whereas salaries may not be going up to upper classes, every single penny left-over for people in classes C, D and E creates a booming market for a variety of products and services and, therefore, the continuous increases on minimum wage above inflation that we've been experiencing here since 2004 is in fact the cause for the excessive demand. If they lowered taxes here from one day to another, we'd experience hyper-inflation once more. Brazilian demand has been hindered since 1994 with Plano Real. People want to buy cars and houses since forever. Credit, however, has not been available for long.

If the government makes public policies to help people buy houses, the first thing to increase are house prices. Credit is expensive, but is available. And both the real estate entrepreneurs and Casas Bahia know about the Brazilian mentality: "if it fits my budget to pay the monthly fees, I'm in!" Savings are still practically non-existent to Brazilian lower classes, and all income received feeds back the system in form of demand.

Adam Gonnerman

My wife and I are hoping to buy a house in her hometown (Uberlandia), but we keep hearing about the prices being ridiculously inflated. I'd hate to get stuck with a home that will cost us more than it will be worth after the upcoming mortgage bubble burst in Brazil.

RFS

There are always two sides in a discussion, specially one about economics. In China there's the very same debate: some people argue that the biggest Chinese cities - mainly Shanghai and Beijing - have huge real estate bubbles. Many Chinese who live in big urban centers have complained about how difficult it is getting for them to afford a home. There are arguments about there being a bubble in China - so much so, that now there are hedge funds betting on a bubble burst in China within the next four years. But of course, there are good arguments against the existence of such a bubble, or at least a huge bubble, in the Chinese real estate market. There are also those who say that a Chinese bubble burst would be much less threatening to the world economy - or even to the Chinese economy - than the US bubble. Others, on the other hand, say China is the biggest bubble in world history and that, when it finally pops, it will bring down world economy with it.

On Brazil, the FT.com published today a counterargument by Barclays Capital (BarCap), an investment bank, about a real estate bubble in here. They conclude: "So far, beyondbrics thinks BarCap’s arguments are stronger than Marshall and Rajpal’s. But we doubt the debate is over."

http://blogs.ft.com/beyond-brics/2011/02/28/brazils-subprime-crisis-disproved/

Some Brazilian market analysts also fend off the existence of a bubble based on facts that Marshall and Rajpal did not address and/or don't seem to be knowledgeable of - for instance, that mortgage credit in Brazil equals less than 10% of total credit; that interest rates on bank loans in Brazil, in contrast to what happens in the US, do not vary according to the market's whims, that is, whether or not the Central Bank increases the benchmark interest rate makes no difference to the proportion of defaults on credit; that Brazilian banks always see that they can negotiate with the borrower extensive guarantees in case the borrower doesn't meet his obligations (for example, in case the borrower defaults, the bank can legally take ownership of some of his personal goods such as houses or cars); and finally, that high interest rates make standard loans so profitable for banks, that the temptation to invest in risky businesses is not high. The FT.com article also points that the proportion of debt service as a percentage of total household income has been stable the since the late 2006.

Anyway, as I said, there are always two sides in discussions about economics. Economics is not an exact science - as Delfim Netto says, it is 90% art and 10% science. As such, I think it's fair to say that this debate - whether or not Brazil (or, for that matter, China) has a real estate bubble - will only be settled if or when the hypothetical bubble pops.

James Miller

Remember, Brazil is a developing country and it will always be a developing country. Eventually this little bit of prosperity will end and people will stop talking about Brazil as the country of tomorrow. We were told the same story in the 80's and look how that turned out. Spend a little time there and see how the place really functions.

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