Friday, February 25, 2011

Brazilian Housing Bubble! Not IF but WHEN?

I was just reading a blog post from Adventures of a Gringa in Rio and just one thing comes to my mind,
the HOUSING BUBBLE IN BRAZIL is about to burst, it's not a matter of if, but when, in my opinion.
I am not so concerned about the accelerated consumption, higher demand or even inflation in Brazil.
If I know Brazilians well, and I like to think that I do, they have become MASTERS of controlling inflation, trust me.
If you lived in Brazil in the 80's, you would understand what I am talking about, Brazil would be able to control inflation with their eyes closed and their hands tied behind their backs.
Let's say, we Brazilians have our problems, but we DO LEARN FROM OUR MISTAKES.
My biggest and constant concern is the huge risk regarding the outrageous and senseless real state speculation that is going on in every part of the country, Rio is an exception, let me explain why.
There is even more speculation in Rio because of some very specific factors happening only in Rio.
The growth of the Oil industry in the whole state of Rio de Janeiro is in my opinion, the largest exception to the rest of Brazil.
The city of Santos, where the largest Brazilian harbor is situated is going thru a similar real state boom and accentuated speculation for some of the same reasons as Rio, the biggest one, there has been HUGE recent Oil discoveries in the area which caused many companies are moving into the city.
Back to Rio, real state prices are really heated up for a combination of reasons, first, there is no room to built anything anywhere, the city is smashed between the ocean and slum filled mountains, so unless you move some favelas away from the Central part of the city or buy an old building to bull dozed it down and built a new one in it's place, there is no room for real state expansion downtown, period.
There is also real and solid improvements in the safety situation, which is HUGE and have plagued the city for decades.
There is generalized optimism because of the Olympics and the Soccer World Cup and most important of all, there are real companies, who are starting to do REAL Oil Industry related business in the area and they need a place to work.
Having said that about Rio, I have to say that in Sao Paulo and other parts of Brazil there is generalized, senseless and insane speculation, very similar to what I saw in Florida and California just when the housing bubble was starting to literally explode.
What did it in the US was the absurd and unrealistic price of Oil that placed everything in a downward spiral, taking the fragile housing bubble down the drains along with the rest of the economy.
But Brazilians are completely blind right now, it is like they are on crack and won't listen to you.
I begged a good friend not to buy an apartment in Sao Paulo a month ago and she told me she HAD to buy it because the prices were gonna keep going up and soon she wouldn't be able to afford it anymore...HOW WRONG!

Expensive, unrealistic real state prices, a clear sign of a Housing Bubble!

My own brother bought a SUPER overpriced apartment just last year and I couldn't talk him out of it. He was paying R$650,00 a month for the rent on his apartment, as soon as he left to his new bought condo, the owner rented that same one bedroom apartment for R$1680,00 a month to the new tenants. More than double what my brother was paying.
Most rents are double what they were just a couple of years ago.
New construction apartment buildings in Sao Paulo are selling in a couple of hours and most people buying the apartments are not buying to live in them but to flip them and make a quick 50K bucks...just like Florida and California in 2004 and 2005, it is sad to see them driving their own financial situations down the drain and not being able to stop them. BEYOND FRUSTRATING.

It's simple, prices can't go up if salaries and income are not rising!

On our last visit to Sao Paulo, my brother had a Pizza making party at their new fancy building with a kiosk and Pizza oven right next to an awesome lap swimming pool with a water fall. An hour into our Pizza making event, one of our best friends showed up, all excited, he had just bought TWO brand new construction apartments at Vila Prudente, right next to the new subway station.
Our friend told us they went to the launch of this new construction and arrived at 5am, on a Saturday, there was already a huge line of interested buyers, just waiting for the opening of the sales of the new building.
The construction company opened the sales at 9am and SOLD ALL units by 11am that same morning.

Another HUGE sign of a Housing Bubble, accelerated speculation!

Our friend already has his own "Overpriced" apartment in Sao Paulo, he just recently got married.
But he used his year end bonus for a down payment on 2 new units of a new construction apartment that he never intents to live in...he actually said he wants to sell it before construction is even ready. CRAZY!
The Realtors, off course, the most interested parties in the equation, assure them, that the housing Bubble won't happen in Brazil because there isn't any predatory lending going on...and folks in Brazil have to put 20% down to purchase a home, think again, HOUSING BUBBLES are all about unrealistic overpriced real state.
The sheeps are hearing from the wolves that they can relax, nothing is going to happen...yeah, right! it's the same thing we heard just before our bubble blew up on our faces all over the US.

Construction companies on the left and Realtors on the right :)

I am just saying, if you are about to buy real state in Brazil, do a lot of investigating and find out it there has been absurd speculation or if it's a good deal.
I would rent until the real state market crashes and buy something when prices go down like they are still going down around here.
Not a good time to buy real state in Brazil in my opinion!



Ana LuX said...

Hey, Ray!
I totally agree with your post. There's something really scary and crazy going on around here!
Just as an example of how crazy and senseless things are, I will share a recent story:
I was visiting some friends at Vila Romana (in Sao Paulo's West zone) a couple of weeks ago and decided to go for a walk in the neighborhood. I used to live in a house there before moving to Granja Viana, in 2005, therefore I was awfully surprised to see a formerly quiet, cozy and green neighborhood changed into a crowded, full of traffic and skyscrapers one just in a blink! Apartment units with an average of 110-120 square meters being sold for well over 1 million Reais, located in buildings of 25+ floors, divided in 3 or more towers in the same condo complex. Just surreal! Especially when I started to compare the price given for my beautiful 330 square meter house in a 700 m2 lot in green and quiet Granja Viana... What a difference!
I was also shocked to hear that a brand new 90 m2 apartment I sold 3 years ago for a good and realistic R$ 250 K is now being sold for over R$ 500 K!!!
So, my plans of going back to the city is definitely going to be postponed!

Gil and Ray said...

Hey Ana,

Good to see you here!
Your story is a great example of what I am talking about.
Maybe you should just wait until the real state market crash and then buy your 1 million dollar place for 200 thousand. ;)
If we moved into the city right now we would totally rent until the market stabilizes.
Thanks for sharing your story.


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