The Brazilian Mortgage Market: Room to Grow

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 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. According to Jose Carlos Oliveira, professor of economics at the Unb (University of Brasilia), “The changes revolved around real estate guarantees. 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 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.”

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 is outperforming the rest of Brazil economically, and has considerable room for upward price movement.

In the northeastern state of Ceará, MDMY Investment is undertaking several property developments that range from social housing under the government’s Minha Casa Minha Vida program, to upper end beachfront condominiums. Director Jamie MacDonald-Murray notes that government investments into the area point to a sustained boom in local property values. “In places like Pecém, near Fortaleza, the government is dedicating huge investments into infrastructure, especially related to energy and transportation. The area has attracted further investment by large corporations such as Petrobras and several large international steel companies. One result is a large increase in jobs. We are also seeing improvements in transportation and access, reformed common areas in the towns, and other elements that improve life quality, such as more educational establishments. All of this is great for future property values. We expect this trend to continue.”

According to MacDonald-Murray, tourist areas are also beneficiaries. “The governments wants to upgrade tourist destinations, especially near big cities that will host the World Cup in 2014. For instance, Cumbuco, where we have our Cumbuco Beach Sun property, is growing rapidly, with better access, more and higher quality hotels and restaurants, and more recreation options. It’s exciting to watch, since the changes are occurring so rapidly you can see the difference month-to-month.”

MDMY Investment is a Brazil-based and operated Investment Company specializing in the Real Estate Development, Construction, Tourism, Security, and Environmental sectors. We offer overseas investors secure, high-yielding investment opportunities in several of Brazil’s fastest-growing business environments.