To foreign eyes Brazilian real state is a catch. A population of almost 200 million and an historic housing deficit makes an interesting combination. Interest rates have always been the main contrain. And now, with the return of inflationary pressures, interest rates are set to raise again. How does it affect the housing industry?
Today the Brazilian Central Bank announced an increase in its benchmark Selic rate by 75bps to 9.50%. The decision was unanimous. The Selic had been at 8.75% since July 09. Today’s decision is probably the first in a cycle intended to cool the economy back to sustainable levels. Additional hikes are expected along 2009, leading the Selic to 11.75% by the end of this year.
Homebuilders recent performance. Companies listed in the Brazilian stock exchange have underperformed in 2010 by 20%,, when compared to the index. Some investors believe it might be getting in a level worth betting in. But they are not really bullish about it.
Dalton Gardimam, chief economist at Bradesco Corretora points out that “the common sense idea is quite simple: Brazilian investments have been in hibernation mode for almost two decades, and now that most of the severe imbalances in the economy have been painstakingly addressed, the country is ready to take off again, delivering the potential everyone thinks the country is capable of.”
Housing demand x high interest rates. Furthermore, he adds: “It is practically impossible to create a sustainable system to finance housing when real interest rates are 16% (average for 1991-2007). We assume this macroeconomic imbalance (ever-increasing interest rates led by inflation) is dead and buried. With most the world drowning in housing debt, Brazil really stands out as a major frontier with housing financing at just 2.7% of GDP. This is where the real action is going to be on the investment front, since machinery investments are not low in Brazil, at around 10% of GDP and picking up recently. We can envisage an increase in these investments but the room for expansion is fairly limited. The other important component is construction investments in public administration, which encompasses “infrastructure” in general. This item went from almost 4% of GDP in the 70s to approximately 1% of GDP recently. In a sense, the deficiencies we talk mundanely about on an everyday basis are found in insufficient investment in this item (highways, airports, ports, bridges, hospitals, etc.). Investments in the two mega sports events fall into this category too.
Housing is the answer. At the end of day the challenge is how to leverage the investment ratio from 15%-16% of GDP to 22%-25%. We are convinced that housing investments are the major channel to do so, with important contributions coming from infrastructure and pre-salt investments. Our back-of-the-envelope calculation suggests that 70% of the increase in investments will come from housing. Strangely, in the national accounts data, investments in this category did not pick up in the recent growth cycle (2004-2008). Again, average real interest rates were exactly 9% over this period, which explains this fact. That is why laying the groundwork for bringing down real interest rates is of utmost importance. The 2008 global financial crisis postponed some initiatives on that front given the need to smooth aggregate demand through aggressive fiscal and quasi-fiscal actions to foster consumption. Higher rates now are a natural development of those efforts. Maybe as important as taking some time for a panoramic view on investment is a panoramic view on savings. Next time.”
Rain and urban chaos. Recent news on the damages caused by the rain in the state of Rio de Janeiro are a tragic evidence of the deficit of housing in Brazil. The favelas are the lack of legitime popular housing solutions. A social problem with consequences in health, security and now urban catastrophe.