Property prices not expected to fall in Brazil in 2014

Real estate prices in Brazil have been cooling since the end of 2011 but they are not expected to decrease in 2014 due to supply and demand inbalances, according to a new report.

However, although statistical data are scarce and there is a wide dispersion of prices and incomes, available information shows that residential properties in large metropolitan areas have become very expensive for the broader middle classes.

The most up to date analysis of the housing market from Fitch Ratings points out that for many property is only accessible through high leverage and long term financing of up to 35 years.

‘This explains the slowdown of income adjusted price increases in the last two years to a cumulated 10%. Rental yields have fallen to levels below low risk investments and are sharply below mortgage rates,’ it points out.

It also says that the background to the current situation is one where teal property prices nearly doubled between 2008 and the end of 2011, while real incomes grew less than 15%. ‘The surge in home prices was mainly driven by massive credit expansion, which followed the sustained decrease of historically high interest rates, the increased availability of cheap savings deposits that partly have to be used to fund mortgages, and legal reforms that streamlined the foreclosure process. As banks tried to increase mortgage lending, loan maturities were extended and LTV limits were relaxed,’ it explains.

‘Meanwhile, supply has not kept up with surging demand for property ownership, creating an imbalance that is unlikely to be solved in the short term. Brazil suffers from a general lack of good quality homes, it adds.

The report also reveals that mortgage rates are at record lows but mortgage lending is largely funded through savings deposits and, for subsidised lending, the workers’ fund FGTS. Under Brazil’s Housing Finance System (SFH), banks must direct a part of savings deposits to mortgages and other housing related assets.
Mortgage rates have dropped below 9% and the largest lender, the government owned CEF, is the dominant player with 70% market share. But Fitches says it expects that the government will probably not allow CEF to increase mortgage rates significantly for political reasons and therefore expects mortgage rates to increase only moderately in 2014.

‘A precondition for the surge of mortgage lending since 2007 from extremely low levels was sufficient availability of savings deposits. However, year on year growth of outstanding mortgages was much faster, with an average of 41% since 2009, against 16% for savings deposits,’ the report explains.

‘If mortgage lending continued to grow at recent rates of around 30%, new and probably more expensive funding sources would become necessary in the near future. Savings deposit growth was relatively strong in 2013, but could start to decrease soon, with economic growth sluggish and salary increases expected to become smaller,’ it adds.

The report also points out that recent mortgage lending growth rates look unsustainable. New lending growth is expected to start slowing down in 2014 already mainly due to the macro economic environment and Fitch says that growth will probably remain in the double digits. But since new lending is still high compared to the outstanding balance, the latter may go up by 20% or more.

It says that prepayments have been relatively high in Brazil, helped by the fact that there are no prepayment penalties. Fitch has observed average prepayment rates of 10% to 15% for CEF portfolios since 2011. Highly seasoned loans show even higher rates.

‘Fitch expects that slower salary and lending growth, coupled with the upward trend of interest rates, will reduce prepayment levels in 2014,’ it concludes.