Brazil had one of the shortest recessions in the world when the international financial crisis hit. In fact, you could barely call it a recession at all. When Brazilian GDP fell for the second straight quarter in Q1 2009 it fell into recession. In Q2 2009 Brazil popped back out of the short-lived recession with a strong growth of 1.9%.
However, the weak performance in the first half of the year was sufficient to bring a 0.6% contraction in GDP for the year as a whole in 2009. But since then Brazil has surged forward, with GDP growth of 7.5% in 2010 and 2.8% last year. This period of rapid economic expansion has been conjoined with concerted government efforts to increase access to housing finance and make home ownership accessible to the masses.
During his two terms as President ending January 2011, President Lula successfully brought 20 million people out of poverty, and added 27 million people to the country's middle classes. This growing affluence, combined with growing access to mortgages, and schemes like Minha Casa Minha Vida (My Life My House, a scheme to make home ownership possible for low earners) generated incredible demand for property in Brazil. In fact, according to many reports, the poor quality of most of Brazil's housing stock left a supply shortfall of around 7 million and growing as of last year.
But it also led to rapid price escalation as well. According to BOPE Inteligência, a research firm pioneering Brazil's first statistically sound house-price index, says that in 2010 the average price of a new apartment in São Paulo rose by around a quarter, and by much more in the poshest areas. By October 2011 said that prices in the city were now up by 31% on the year. I have used Sao Paulo because data is the easiest to come by because of the headline-making growth, however, Natal and several other cities have also experienced strong real estate price escalation during the last 2 years.
This strong growth brought the obvious question of the day, as to whether or not the growth represented the bubble of an overheating market. However, I do not believe that we have to worry about that in Brazil just yet. While access to mortgages is growing, the actual market for mortgages is tiny, with most of the financing coming from developers, and foreigners can't get mortgages at all.
In the likes of the UK for example, the rapid house price escalation that inflated the catastrophic bubble was fuelled by a cycle of greed, which in turn was fuelled by incredibly loose lending by the banks. Estate agents were setting prices based on what people would pay, and the banks were lending not 100% of that price, but 120% so that people could buy and refurbish in a one. There was seemingly no limit on what banks would lend. People were getting loans that they couldn't really afford and we were heading for a disaster.
In Brazil lending is limited, and never goes anywhere near 100% even for those who can get a loan. Because the developers are providing the finance, it is in their interests to ensure they are lending against a fair value and not an exaggerated one. Because of this, Brazilian house prices are growing based on growing demand for property, which in turn comes from the growing population and the growing affluence of that population as the economy grows.
Prices are growing fast at the moment, but this is simply because of just how low wages and prices were before, compared to now. Given the lending situation it is more likely the growth will stabilise into a soft-landing, than anything like a crash.
Read more about Brazil in the IPIN Member exclusive BRICs reports here
- Wednesday 29 February 2012