Why is Brazilian Real Estate market booming?

The whole world is looking at Brazil when it comes to the Real Estate market. Industry giants attract international attention and inject liquidity and movement in the sector — no wonder, since it moves R$ 650 billion (U$D 120 billion) per year! So, I decided to write this article to explain all this, based on my experience.

Brazil lacks 5,8MM homes (1MM only in São Paulo metropolitan area)

The housing deficit is an index that considers the number of people and / or families living in poor housing conditions in a determined region. Some variables are used to calculate the need for additional housing:

• Number of rustic or precarious households, such as cars, tents and shacks;
• Cohabitation: two or more families living together without full privacy (shared use of bathroom and/or laundry);
• Excessive density in rented households (one room with more than 3 people);
• Rent spent vs income: people earning up to 3 minimum wages (˜590 USD) who use more than 30% of their income to pay for their housing.

In 2020, almost 12 million Brazilians suffered wage reductions and unemployment reached 14% (record rate), which may further compromise the shelter issue. Let’s follow what the next survey (PNAD — IBGE) will show us about the post-Covid scenario in this regard.

Public initiatives that accelerate the sector

Check below three factors that stimulate properties acquisition in Brazil.

The first, Casa Verde e Amarela (formerly Minha Casa Minha Vida), is a Federal Government social program that helps people with monthly income of up to R$ 7k (U$D 1.5k) to buy their own home. The government offers subsidies of up to 90% for construction and financing: good for the population, who has access to housing, good for construction companies, who build popular properties with guaranteed liquidity, and good for banks, since they have demand for transactions with short risk, since the government is behind them. More than 5 million people already acquired their homes thanks to the program.

The second is the FGTS (Fundo de Garantia por Tempo de Serviço) withdrawal permission for the purchase of real estate. FGTS is a fund for each worker at Caixa (public bank) in which the employer deposits 8% of the gross salary month every month. The gathered amount can be used by the citizen on specific occasions — one of which is the purchase of properties of up to R$ 1.5MM (U$D 300k), to be used as the holder’s home. We are talking about almost R$ 9 billion (U$D 1.8bi) deposited monthly in FGTS, which can be used for home buying!

The third and last is a tribute for real estate profit (lucro imobiliário). It is a tax corresponding to the value that one earns from the sale of a property (when the sale value is greater than the purchase price in the past). This tax can reach 22% of the capital gain (delta). However … those who purchase another residential property within 180 days are exempt from this tax. :)

These stimuli move the market and inject demand into the buy and sell market. But… what about rentals? Let’s check the following session!

Interest rates determines when it is best to buy or rent

Selic represents the basic interest rate that regulates the Brazilian economy. When I wrote this article (April/21), it was close to its lowest historical level, 2.75% per year. It influences directly the interest rates on real estate loans, which have been falling, stimulating even more the purchase of properties. As a result, real estate financing rose 57% from 2019 to 2020 in financial volume.

In addition, when opting for the SAC (Constant Amortization System — the most common in Brazil), the financing installments do decrease over time, while the rent value only increases over the contract (IGP-M). To give you an idea, at the time of writing this article, the IGP-M accumulated in the last 12 months was 31%, which is the basis for yearly rent adjustments if the owner does not agree to renegotiate. Wow!

This scenario changes a lot when the Selic rate goes up, because fixed assets could yield much more in investments — even in the most conservative ones!

That is why, at this moment, it is more worth buying than renting in Brazil. Of course, we have not yet mentioned the psychological aspects, since leasing allows flexibility and freedom, while the purchase enables the construction of assets. Which brings us to the next block, about cultural aspects.

Whoever invests in land shall succeed

My mother tells me that since always, together with “until you are 30 years old you have to sign a contract to buy a property”.

A MindMiners survey on dreams and pretensions shows that for 52% of Brazilians, the acquisition of the property is top priority in life; for 28% it is the second highest priority, right after studying. It is the most important purchase in people’s lives, loaded with emotional aspects. After all, a property is the symbol of conquest, it is an expression of one’s own identity, it is the safe haven of oneself.

Silvio Santos, a very famous Brazilian TV presenter, in the iconic program “Pião da Casa Própria”, in which the participants turned a roulette wheel to compete for a property, was already gaining lots of audience and engagement on behalf of the greatest dream of Brazilian people, in 1969.

And how to explore (in a good way) this demand, which is a dream rooted inside most Brazilians? It is not trivial, especially in a context with the following characteristics.

Fragmented and non-transparent market

In Brazil there is no MLS (consultation basis that shows the totality of the available real estate offer). There have already been many initiatives to build one, and it will be fantastic if someone actually succeeds. Thus, there are more than 1,500 real estate developers, 50,000 real estate agents, a few dozen proptechs, a few dozen portals and more than 400,000 agents looking to differentiate themselves and attract customers. And so, the already painful buyer / renter journey becomes even more complex and full of insecurities: lots of FOMO (“the next property will be perfect”), frustration, pricing uncertainty, commoditized communication. I wrote a Linkedin post about my analogy regarding information asymmetry generating a Lemons Market, feel free to check it in my timeline.

Fortunately, it can no longer be said that it is a market untouched by technology. But there is still plenty of room for it to actually transform the journey of the customer and those involved in the business. The efforts of all companies in the sector, each in their own approach, will undoubtedly contribute to improving the experience of searching for a new property. So be it!

The opportunity is huge, the pain is distressing and, the main thing: the purpose is extraordinary.

If you want to talk about all this and more with me (I have a very particular point of view regarding real estate agents), just call me for some coffee. :)

(original article published in April 2021 on Linkedin, now transferred to my Medium)