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A housing bubble, Brazilian style

Home prices in Brazil have surged up by 200 percent since 2008 while access to credit remains stable. The opposite of what happened in the United States and Europe

View of downtown São Paulo.
View of downtown São Paulo.

During the first semester of the year, a São Paulo merchant received an offer for his store. The shop is located in one of the most important business districts in the city. Selling was not in his plans, but he decided to listen to the proposal. When he found out that the interested party was willing to pay 1.7 million reales (741,936 dollars) he took a deep breath and tried to hide his surprise. He closed the deal on the spot. “At the most it was worth 800,000 reales (about 350.000 dollars)," the businessman recounted. He invested his new fortune in the stock market.

In the neighborhood of Perdizes, in the western part of the city, a apartment of 50 square meters, is on sale for 420,000 reales (183,302 dollars). Five years ago an apartment of 120 square meters, located about 30 feet away, sold for 330,000 reales (144,023 dollars). Today, that property is worth 900,000 reales (392,790 dollars). Cases like this are happening in all the major Brazilian cities, creating a kind of housing bubble. Prices that have no mathematical basis like these suggest that something is wrong.

The first thing that comes to mind is the housing bubble that exploded in Europe and in the United States in 2008. It dragged the affected countries into an unprecedented financial crisis. Brazil, however, is experiencing a price bubble, not a credit bubble, as was the case in 2008.

Americans then fell prey to a deluge of credit with high risk financing. The financial markets manufactured mortgages that they turned out to be junk, amplifying the scope of the problem. In Brazil, however, mortgage loans reached 7.9 percent of the Gross Domestic Product (GDP) in August. In 2012, it was 6.8 percent. In 2011 loans in the United States accounted for 76.1 percent of GDP and in the United Kingdom for more than 80 percent of GDP.

Brazil is experiencing a price bubble, not a credit bubble, as was the case in Europe and in the United States

The financial markets in Brazil, with its tragic history of Greek dimensions up until the 90s while inflation reigned, later became more careful in its investment of resources. In the case of loan concessions for mortgages, it was even more rigorous. In 1997, the government officially recognized no fiduciary responsibility on the part of lenders to home buyers -a measure that allows banks to repossess the home if the buyer can no longer meet his regular payments. Moreover, banks only give loans to persons who can show that the payments won't take up more than 30 percent of their income. Today, mortgage debt is at about 20 percent.

The accelerated expansion of the housing market, however, has fed a price messy scheme. The increase in mortgage loans, like currency fluctuation, coincided with the government's own housing projects, like Minha Casa Minha Vida, to benefit the poor. Prices on construction materials also climbed as the cost of land rose.

According to the FIPE Zap Index that monitors the housing market, asking prices increased by 230 percent en Rio de Janeiro since 2008. In São Paulo prices rose by 188 percent in the same period. An apartment in one of these cities can cost up to 60 percent more than in Miami, according to a report from the real estate company, Élite International Realty. "The prices have surpassed the limits," explains Samy Dana, professor at the School of Economics at the Getulio Vargas Foundation (FGV). "In order for a bubble to form, some people must not believe that it is happening. If they did believe it, no one would buy the properties," he explained. The economist said that one of the elemental factors of the bubble is "the greater fool theory," which means someone buys a home or apartment for fear that prices will climb even higher in the future.

This issue has even drawn the attention of one of this year's Nobel Prize winners for economics. While visiting Brazil last August, Robert Shiller warned against the bubble. "What caused such dramatic increase in prices in the last five years? Didn't inflation go down? Prices fell by 25 percent in Los Angeles and in New York during that same time period. Why did the prices in Brazil increase steadily?," Shiller said to the Brazilian Web site Infomoney. "I can't determine whether there is a bubble or not because I don't know the characteristics of the local market well enough. But comparing the data from Brazil with those of other countries, I can say it calls for caution," he warned. Shiller, considered one of the gurus of the U.S. housing bubble recalled that prices in Japan experienced the same movement in the 1980s and then, in the early 1990s, they began to fall steadily. Eventually they lost two-thirds of their original value.

Brazil's financial system was more rigorous in the concession of credit for home purchases

Real estate companies admit that there have been oscillations in the prices but they say there is no risk for the larger economy. "We confuse bubble and inflation a lot," Celso Petrucci, the executive director of the head economist at the Syndicate of Housing in São Paulo. "Our credit system is still healthy," he said, pointing out that Brazilian banks are conservative with loan offers.

The economist recalled that there had been a deficit in the construction sector for the last two decades. "We have worried about the prices, the bubble, but we have forgotten that from 1985 to 2005 the youth had no avenue to home ownership," Petrucci said. "Today, 74 percent of the financing goes to first time home owners."

Dana, however, doesn't take the long view. "It's easier to see the price bubble than the credit bubble. Just because people say there isn't a bubble doesn't mean it's true."

Dana is not alone. The rampant rise in prices is a hot topic on social media platforms. Web sites and blogs have been created to denounce the market. The creator of, a man who works in the tech industry and prefers to remain unidentified, said that he had the idea in 2010 when he saw that home prices had risen by 50 percent in a little more than a year. "The blog started as a place to bring together like-minded people who thought there was something wrong with the market." According to him the Web site receives between 8,000 to 10,000 readers every day.

The blog, Tem Algo de Errado ou Estamos Ricos, or Is Something Wrong or Are We Rich makes comparisons between property prices in Brazil and abroad. Using data from classified ads, it compares homes for similar prices in places like Rio de Janiero and Sevilla, Paris and Curitiba, New York and Belo Horizonte, and Las Vegas and Itabirito. "The idea was to show a few friends and acquaintances the absurdity of the housing market in Brazil," she wrote in one post.

In one example, the blog compares a three-bedroom apartment measuring 147 square meters in Chicago for 55,100 dollars and a one-bedroom apartment of 35 square meters was offered for the same price in the Tatuapé area of São Paulo.



Translation: Dyane Jean François

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