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Please see below some Q&A´s with Ana Maria Castelo, economist and project coordinator for real estate construction statistics at the Getúlio Vargas Foundation (FGV) – one of Brazil´s leading universities and research institutions.  Ana Maria has long been well-recognised as always providing reputable insights into the market, regularly featuring in the national media on a wide range of issues related to Brazil´s housing and infrastructure:

(1) It was recently reported by Secovi-SP that there was a drop in the levels of sales by 28.6 percent in São Paulo between July 2010 and July 2011 – what do you feel are the principle causes of situations like this? Such drops have been witnessed in many of the prominent cities of Brazil including Porto Alegre and Belo Horizonte.  However, the basis of comparison is exceptionally high – 2010 was a year of rapid and debatably sub-normal growth of a market that was in the doldrums for some time.  It is therefore not a particularly accurate picture of the medium-long term market to use comparisons based on such patterns.  Furthermore, this leap has less space to move further at such a pace as affordability levels are largely at their limit.  The Brazilian banks, for example, take a strict view on mortgage finance and will simply not finance real estate that beyond the means of the borrower.  It should also be remembered that Brazilian credit conditions remain favourable as well as the fact that employment and income levels are continuing to grow – the indirect effect of these factors on the market is likely to be more of a steady level of growth in the coming years.

(2) Do you therefore think that the increasing appearance of the word ‘bubble’ to describe the Brazilian property market is an unfair description? I do not believe there to be a housing bubble in Brazil.  Whilst it is true that prices have risen to levels that could warrant such reasoning, there are a number of important fundamentals that need to be considered.  Relatively speaking, Brazil has only had an established housing credit sector for a short time.  At the start of the century, the proportion of national GDP was at 2 percent which has grown to 5.2 percent today – this can be compared to 12.5 percent in Mexico and 15 percent in Chile.

(3) What do you think are the main factors that would mean that Brazil’s property market could not move in the same direction as what was witnessed in Europe and the USA since 2008? The European and American crises were prompted by what was a disproportionate level of housing credit concessions which is simply not the case in Brazil.  As discussed above, whilst sales levels have already seen drops, there is not going to be a similar crash as the fundamentals of our system compared to theirs are very different.  Our banks, for example, have had an average home loan (alienação fiduciária) delinquency rate of 1.2 percent of all contracts since 2007 (delayed by over 3 months).

(4) Looking at the overall economy, it has been recently seen that the level of inflation in Brazil remains above the government target – how do you think this will affect both the property market and the housing credit system? Without a doubt, with inflation growing the way it is currently, it is going to be difficult to sustain economic growth rates – the effects are likely to filter through to the real estate market and the credit system (both secured and unsecured).  Yet, this year has seen the government announcing public spending cuts and other measures which should, in theory, help bring rapid price rises under more control.

(5)  Do you think that inflationary pressures on construction inputs are likely to continue at the strong pace that has been seen in recent years? I believe that a significant proportion of inflation in construction is being driven by higher costs of labour. The rapid growth of the sector has continually pressed the labour market and workers are now demanding higher wages – this is a scenario that will remain, particularly as construction companies certainly cannot bring salaries down.  Only investment in improving the construction workers skill sets, more productive construction methodologies and industrialisation of the sector can reduce the pressures in the medium term.

(6)  Moving on to low income housing [readers will note that this sector forms over 90 percent of Brazil´s housing deficit] – do you think that real estate is beyond the affordability levels of the demographic? Yes, I do – an issue that has been caused by income levels not being proportionately sufficient, a heated property market and the high interest rates that Brazil has long been accustomed to.  For this reason, the future role of the Minha Casa, Minha Vida is so important (combining grants with subsidised housing finance).

(7)  What do you think are the central issues related to handling the housing deficit – particularly with the high proportion of favelas (slums) that remain in Brazil? The risk of growing low income populations in fast growing Brazilian cities without adequate housing is a fundamental issue that needs to be managed effectively in the coming years.  Even with the Minha Casa, Minha Vida programme in place, progress is not moving at a sufficient velocity – a situation that has become even more difficult with the rapid rise in national real estate prices and a market that is increasingly moving away from the needs of the demographic.

(8)  What do you see as the major problems facing the Minha Casa, Minha Vida? Whilst the programme certainly has made housing more accessible to low income groups – more developers have become reluctant to enter this segment due to the difficulties facing the inputs of construction such as labour (discussed above), materials and the higher costs of land which have collectively made projects unviable.

(9)  Could you give us some of your own opinions with regards to how the programme could be reformed in line with the reality of the market? In the large cities, the housing problems need to be considered in the context of future metropolitan expansion and the interconnection between the public and private sectors.  Due attention also needs to be made with regards to urban mobility in addition to well thought out mechanisms that can make housing more accessible financially.  The growth of smaller cities also needs to be managed effectively, where the challenges and adjustments will be made equivalently (albeit on a smaller scale).

(10) Particularly for foreign investors, it remains difficult to research the Brazilian real estate market – could you provide us some tips for our readers to have more confidence when undertaking in due diligence? With the market reinvigorating itself in recent years, studies into its dynamics have noticeably become more frequent.  Price indicators are still new in Brazil but will certainly grow in the coming years as the industry matures.  One immediate useful reference for your readers are the monthly open market asking value measurements undertaken by Zap, who have the largest property portal in the country [see our monthly factfiles via our homepage for the latest infographic].   In late last year, the FGV launched its commercial real estate market index (Índice Geral Mercado Imobiliário Comercial, IGMI-C) with the residential model expected by the beginning of 2012.

(11) There has been growing concern with regards to the lowering level of wholesale credit availability for the banks to access in the coming years – what are your thoughts on potential alternatives? Today, housing credit fundamentally depends on the Guaranteed Fund of Service Time (FGTS) and the national savings (poupança) – yet, with no secondary mortgage market in existence, these two sources will not be sufficient in terms of the capacity to handle future real estate market growth and there will be a need to attract new investors.  However, due to the fast growing international attractiveness of Brazil´s real estate market – contrasted with weaker performance of sectors throughout the developed world – most are expecting that this should not be too much of an issue.  A number of new mechanisms are being proposed and debated.  Nevertheless, it will be important to not expose the housing market to credit risks in order to ensure sustainable growth.