Published: 26 Oct, 2016
After years of skyrocketing housing costs in Brazil, the market has come down to earth since the recession. Next year will see even deeper declines in Brazilian real estate. Fitch Ratings said Tuesday that home prices in Brazil “will drop further as the economy remains challenged.”
This does not bode well for Brazilian housing stocks, especially super volatile Gafisa (GFA). The stock is down 9.7% in mid-afternoon trading on the NYSE.
Fitch warned that limited supply in some cities should limit real price declines, but did not mention the cities. Sao Paulo and Rio de Janeiro capitals are likely to be two of them. Developers dedicated to these urban homes may still do well if they are not dependent on the government’s housing subsidy program.
Brazil’s GDP is set to drop another 3.3% this year and barely break even in 2017. Increased unemployment, job insecurity, continually high interest rates despite the 25 basis points drop last week to 14% and budget cuts at state levels will keep demand for residential mortgages low. Weak economic factors have been reflected in new home sales, declining by 9% from October 2015 to September 2016, according to FIPE-ZAP, a housing market index.
High unemployment and interest rates could force Brazilians to take from their savings accounts. The reduction in savings deposits so far has lowered mortgage lenders cheapest unsubsidized funding sources and forced banks to restrict lending while hiking mortgage rates, Fitch analysts said in a note on Tuesday. Between January 2015 and June 2016, outstanding savings deposits declined by 17%. Over the same period, average monthly mortgage lending dropped by twice that amount –35%.
Home prices in the big cities are still too expensive compared to incomes. For investors, rent yields are also lackluster. Sao Paulo’s average apartment costs around 15 times the city’s per capita GDP. Average annual rental yields in Sao Paulo are a mere 4%. Investors are better off buying long-term government bonds which yield 6% plus inflation. Mortgage rates average 6-7% above inflation.
Still, this is not a housing crash, Fitch believes.
Brazil’s housing prices have remained stable since the beginning of 2015. Nominal residential real estate values would have to decline significantly before borrowers are owing more than they have in equity. Either that or nominal salaries would have to decline to threaten debt-to-income ratios.
I cover business and investing in emerging markets.
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