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As JP Rathbone reports in Monday’s FT, it’s not just beach-front properties in Leblon whose prices are heading for the sky. In Brazil’s favelas, where police are finally providing a semblance of security, house prices have doubled or trebled over the past few years.
So, time for a bubble warning? For many reasons, in the mass housing market, the answer is a resounding No. What’s harder to measure is the emergence or not of a wider credit bubble. Here, the warning lights are flickering. A new law to monitor borrowers’ credit histories may help.
First, some reasons not to worry about a housing bubble:
1. Mortgage lending is about 4 per cent of GDP. It has doubled over the past three years and will continue to grow but is still tiny by bubble-creating standards.
2. The top-end and upper middle market has largely run its course. Home builders are now piling into the lower middle and bottom end, where home buyers are much, much more price-sensitive than wealthy Brazilians (for whom asking the price of anything is in pretty poor taste). The favela market is an interesting but isolated phenomenon and its behaviour will normalise as conditions improve.
3. Buyers typically make their first payment when their new home is still on the drawing board. By the time they move it, they have paid 25 to 30 per cent of the asking price. With outstanding debt of 70 to 75 per cent of the property’s initial value, prices have to fall a lot before buyers are caught in the negative equity trap.
4. There is no such thing as a collateralised debt obligation in Brazil. Banks are obliged by law to put 65 per cent of citizens’ personal savings into home loans. Most are below the legal limit. Securitisation has not reached the housing market – yet.
5. Recent legislation has made it much easier for banks to foreclose on defaulters.
Second, some reasons not to be complacent:
1. Mortgage lending is expanding and banks are not very experienced. It needs close attention.
2. When banks do get above their 65 per cent limit, they may start to securitise mortgages. Another item for close attention – though Brazil’s tight regulations should still prohibit toxic assets from spreading.
In the broader credit market, however, there is already some cause for concern. Total credit is about 46 per cent of GDP. Again, this is low, but it is rising at a rate of about one percentage point a year, according to the central bank. But official figures hide the true picture: as Joe Leahy reported last week:
Real credit to the private sector has risen by nearly 200 per cent since 2007, according to the IMF, and the country's big banks forecast loan growth of 20 per cent this year.
More worryingly, nobody really knows how much Brazil’s new consumers are borrowing and whether they can afford it. But some consultancies are trying to keep track. Here’s Leahy again in a separate report:
A survey by LCA, a consultancy, found the proportion of Brazilian household monthly income that goes toward paying debts rose to an average of 25.8 per cent in February "“ high compared with developed markets.
That snippet is from a report on a new law to introduce a “positive registry” of credit histories, set to be signed into law soon by president Dilma Rousseff. So far, Brazilians only get a credit history when they default. All borrowers, therefore, are treated as potential defaulters – one reason Brazil has such exhorbitantly high interest rates: an average of 120 per cent a year to personal borrowers, according to Anefac, an assoication which monitors market rates.
Cynics would say banks were quite happy with those kind of rates and might not welcome any change to the status quo. But the law is expected, gradually, to help rates come down. It should also provide another tool for bubble watchers.
Related reading: Urbanisation and cheap credit fuel growth, FT Brazil plans credit history registry, FT Housing boom raises fears of Brazil bubble, FT Surge in Brazil lending hides deeper problems, FT
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