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Why Brazilian real estate prices will keep going up?

30th June 2011 Print

It’s no secret that the Brazilian real estate market is booming. For many analysts, this is just the beginning of a long positive cycle for property in Brazil accompanied by steadily rising prices.

A recent article in the business magazine Exame looks at the many reasons why prices for real estate in Brazil will continue to rise. All the reasons indicate price rises are here to stay providing a compelling argument for property investment in Brazil.

Property Price Adjustment

According to Exame, house prices in Brazil have only just started to catch up with inflation. Their previous prices lagged behind inflation levels and the recent increases prove that there has been some very necessary price-adjustment in the Brazilian property market.

Exame quotes a recent study by JP Morgan into property value and income ratios. The study finds the value of property in Brazil is around 5.5 times the average annual income. In countries like China and Singapore, this rises to 11 times the average income showing there’s plenty of room for house price growth in Brazil.

Supply and Demand Drivers

One of the biggest drivers behind the boom in Brazil property is the huge demand for housing. This demand is apparent at all class levels and at the lower end, the social housing programme, Minha Casa Minha Vida is helping to address the problem.

Many real estate experts believe the Minha Casa Minha Vida programme is playing a large part in the current property boom in Brazil. The launch this week of the second phase of the programme – building 2 million properties in Brazil by the end of 2014 – has undoubtedly boosted the housing market still further.

Then there’s the lack of supply. This is highly visible in all sectors and Exame looks at the commercial real estate sector in Brazil where the shortage is particularly acute. The article finds that Brazil urgently needs new construction of all types of commercial property, particularly offices where vacancy rates are at all-time lows.

Funding for Brazilian Real Estate

While the take-up on mortgages in Brazil has grown rapidly over the last few years, the total loan rate still represents a fraction of the country’s GDP. Exame calculates that loans for property in Brazil currently stand at around 5% of GDP – Mexico and Chile come in at 11% and 18% respectively.

Brazil’s funding system means that here, too, there is plenty of room for growth. Maximum loans on Brazilian real estate are usually 65% and mortgages short term (15 years). Added to the buoyant mortgage market is the abundance of capital market alternatives. Analysts believe that Brazil has ample scope to bring in large-scale securitization over the next few years.

For Obelisk International, the Exame article highlights the fundamentals behind the Brazilian property market. The fact that these fundamentals are simultaneous and set to continue for the medium term underlines the huge potential for property investment in Brazil. The article also confirms Obelisk International’s belief that with price rises here to stay, now is the time to invest in Brazilian real estate to obtain maximum benefit from these increases.

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