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As a result of the facts and figures pointed out in our post ‘Brazil’s Real Estate Price Rises are Highest in the World’, perhaps unsurprisingly the discussion of a potential bubble that is about to burst has remained throughout the country – with the general public consensus continuing to maintain that housing values are out of touch with reality.

According to specialists interviewed by the Exame magazine, preparation should be made to handle what may well be periods of changes – with more believing that the market has become increasingly speculative in recent years (see, for example, comments made by Marcos Santoro, vice president of housing developer Racional).  Indeed, São Paulo Housing Syndicate (Secovi-SP) statistics pointed to a drop in sales by 61.8 percent when comparing March 2011 with the same period of 2010 and the IMOB index – which measures the average of 18 property related share values on the Bovespa – fell by 7.6 percent on the year leading up to 27^th May 2011.

Flávio Queiroz, analyst at Santander stated to Exame magazine: ‘no sector is free from bumps and the Brazilian property market is about to enter a more complicated phase.’  The country’s economic growth for 2011 is looking set to be slower in comparison to 2010 which many are predicting will impact the movement of the housing market.  Nicholas Reade of the Brookfield real estate development company, interviewed in the same magazine said: ‘there is a psychological effect which could be aggravated if official inflation figures go over two digits – people have also become more wary about committing to long term finance agreements’.

Ricardo Torres from the BBS Business School, believes that such a slowdown is necessary and will form part of a natural correction of the market stating to Reuters: ‘Brazilian real estate developers are not able to afford land in the large cities and have large stock piles to sell.  They will have to offer discounts in order to attract investors.’  In the same article, however, Analyst Wesley Bernabé of BB Investimentos believes that should unsold stock levels continue to rise, developers will start to revise the levels of launches which will not have an effect on prices.

Further debate has arisen over the fact that money market capital may also eventually become depleted – which some are predicting could reach critical levels as soon as 2013 (due to the fact that the amount of credit being awarded is proportionately higher than what is in the national housing savings).  Whilst this would lead to the market seeking other housing finance solutions, the ability to keep up with the pace of demand is likely to produce credit supply issues.

Bernabé commented to Reuters that the problems within the Minha Casa, Minha Vida programme are also likely cause issues on the overall market.  A number of developers have halted the launch of such projects which represents a sharp contrast of how the programme was perceived and politically commented upon in 2010 as being ‘motor of the housing sector.’  As a result of prices being beyond what the low income sector can afford, Barnabé predicts that: ‘those that are depending on the subsidy to purchase a house are likely to wait.’

The bigger picture for the Brazilian housing market nevertheless remains positive supported by a number of wider economic factors such as low unemployment, a massive housing deficit (particularly in the low income housing sector) and a fortified banking system.  Affordability statistics produced by JP Morgan demonstrated that the average cost of an apartment or house costs 5.5 times the annual Brazilian average salary – compared to 6.3 times in India, 12.9 times in Singapore and 13.5 times in China.  The Global Property Guide’s ranking places Brazil in 65th position in terms of value position and it is also worth considering the fact that the level of credit lending as a proportion of GDP still remains low at 4 percent (compared to 68 percent in the US, 11 percent in Mexico, 20 percent in Chile and 45 percent in Spain).