Taking a Look at Brazil's Mortgage Market

For international investors considering Brazilian property, an evaluation of the mortgage lending environment can provide clues as to the health and direction of the Brazil real estate market. Currently, foreigners are unable to receive mortgage loans in Brazil. At the same time, the domestic mortgage market in Brazil is very young, with considerable room for future growth.

Currently, mortgage lending represents just over 4% of GDP in Brazil. As a comparison, mortgage debt in the United States hovered between 55-65% through most of the nineties, and rose to a peak of over 70% during the credit crisis in 2008.

Brazil's mortgage market is growing rapidly due changes in the legal framework of lending in 2005:

“The changes revolved around real estate guarantees,” says Jose Carlos Oliveira, professor of economics at the Unb (University of Brasilia.) “In past cases of non-compliance, the person responsible for the financing did not recover an adequate amount. Starting with 2005, the government permitted institutions to work with ‘fiduciary alienation,’ an arrangement where the buyer of the property becomes the owner of the property only after he has just paid it off. Although this option creates a highly risky situation for the borrower, it makes it possible for the person who provides the funds to have an additional motivation because it permits him to recover the property in case of non-payment."

Economist José Roberto Mendoça thinks the upward trajectory of real estate values is sustainable:

"Our prices have increased as a result of liberated demand supported by a number of macro-economic factors such as higher incomes which are limiting the risk of artificial prices rises."

The report starts with examining the theoretical behavior of a housing bubble, pointing out that the US subprime crisis that primarily led to country’s downturn possesses a very different situation to that of Brazil. Mendoça outlines, "The Brazilian economy today is on a sustainable trajectory without short term macroeconomic risks’ going on to state that there are no signals of political or economic changes that will indicate further liberalisation of finance or excessively low interests rates."

Throughout the report, Mendoça discusses a range of issues including the risk averseness of the Brazilian banking system with regards to home lending; the lack of non-speculative data sources; the fact that the degree of leverage of overall house finance levels remains low and that the secondary mortgage market is very much at its infant stages, particularly in comparison to other international real estate industries. Furthermore, mortgage delinquency rates (finance agreements with payment delays of over 3 months) have decreased from 12.02 percent in 2000 to 2.52 percent in 2010.

Through most of the country, a growing middle class will continue to support property values. The low level of mortgage debt is combined with a very high level of home equity among existing homeowners, most of whom own their homes outright.

Mendoça notes that specific geographic areas have seen outsized appreciation, for instance in Sao Paulo and Rio de Janeiro. The extreme cases tend to be due to lack of supply, and can distort perception regarding valuations elsewhere in the country. The northeast in particular is outperforming the rest of Brazil economically, and has considerable room for upward price movement.