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Brazil ignores World Cup costs to lift housing
The Brazilian government isn’t letting an economic slowdown, the World Cup or the Olympics get in the way of its efforts to help everyone from slum dwellers to young professionals buy homes.
Bloomberg News reported that President Dilma Rousseff is using federal subsidies and state-bank loans to boost housing after economic expansion slowed for a second year in 2012 and mortgage growth declined. Home price gains are also decelerating after rising 58 per cent since 2010.
“The market is trying to correct itself” and “the government is throwing more money at it to keep it expanding,” said Adolfo Sachsida, an economist in Brasilia at the Institute for Applied Economic Research, a federal government agency that evaluates public policy. “This market employs a lot of people and they want to keep it heated so employment doesn’t drop.”
Rousseff is pumping more money into the housing market even as interest rates remain at the lowest in Brazil’s history, and annual inflation is running above the central bank’s target for 29 months. As economic growth fell to the slowest pace among major emerging-market economies last year, she nearly doubled spending on Brazil’s plan to build two million low-income homes by 2014, a goal made more expensive as preparations for the World Cup being held that year, and the Olympics in 2016 contribute to higher construction costs.
The amount of home loans outstanding grew 38.2 per cent in 2012, down from a pace of 44.5 percent in 2011 and 51.1 per cent in 2010, which was the fastest since 1992, according to central bank data. Total credit outstanding increased by 16.2 per cent last year.
The government’s measures are helping to sustain prices, setting the stage for a fall once interest rates climb from record lows, according to Sachsida, who co-authored an IPEA report last August that said the government is fostering a real- estate bubble.
“When rates rise abroad, Brazil will be forced to raise rates here too. When they do that, it’s going to hit a population that is already very indebted, and that’s going to pop the bubble,” he said.
The views expressed in the report don’t reflect the opinion of the organization, according to a press official at IPEA in Brasilia, who asked not to be identified in accordance with their policy.
“The majority of analysts have concluded that there is no risk of a real estate bubble,” Dyogo Oliveira, deputy executive secretary at the Finance Ministry, told reporters in Brasilia January 31. “At the moment there is no need for concern.”
The Finance Ministry didn’t respond to a request for further comment.
While 35 million Brazilians entered the middle class in the past decade, according to the Rio de Janeiro-based Getulio Vargas Foundation, the government estimates there is a housing deficit of 6.3 million homes.
Rousseff increased spending on her low-income housing initiative, dubbed Minha Casa, Minha Vida (My Home, My Life), by 93 per cent to 11.2 billion reais from January through November 2012, according to the Treasury.
The government has twice lifted price caps on homes that are eligible for program subsidies since 2009, to as much as 190,000 reais in Rio de Janeiro and Sao Paulo, as soaring land prices prompted homebuilders to lobby for higher payouts to cover construction costs.
Preparations for the World Cup and Olympics also have increased demand, the IPEA report said.
“The program of public works trying to modernize and invigorate some cities for the World Cup in 2014 and the Olympics in Rio in 2016 has been contributing to the appreciation of real estate prices.”
Rising prices are undermining the original goal of the government’s program to reach Brazil’s poorest, because homebuilders are focusing on building more expensive homes that are still within the subsidy scheme, according to Claudia Magalhaes Eloy, a professor of architecture and urbanism at the University of Sao Paulo.
“While those increases may be partially credited to improvements in the housing units, they seem to be mainly explained by developers’ pressures to accommodate escalating costs, due in part to land speculation,” Eloy, Fernanda Costa and Rossella Rossetto wrote in a fall 2012 article for the journal Housing Finance International. “This imposes threats to the continuity of the subsidy policy and causes important impacts on the housing market, reducing affordability.”
From April 2009 to May 2012, just 40 per cent of the homes contracted to be built were destined for families in the lowest income tier, according to Eloy.
The government has delivered one million homes under the program, generating 1.4 million jobs as of December 2012, according to Caixa Economica Federal, the largest mortgage lender in Latin America and the main conduit for Brazil’s federal housing subsidies.
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