The Brazilian real state market in 2012: robust growth or speculative bubble?

Andreassi, Tales
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Rising home prices in Brazil have sparked debate on a possible housing bubble. In light of the credit and housing crisis in the United States, it is fair to question whether or not Brazil’s situation is analogous. Looking at both quantitative and fundamental arguments, we examine the context of the Brazilian housing boom and question its sustainability in the near term. First, home prices tested with basic rental yields and affordability ratios as well an imputed rent model to assess their relative to equilibrium levels. Second, we examine some fundamental factors affecting housing prices – supply and demand, credit and regulation, cultural factors – to find evidence justifying the rising home prices. From these observations, we attempt to draw rational inferences on the likely near future evolution of the Brazilian housing market. While data suggests that home prices are overvalued in comparison to rent levels, there is an evidence of legitimate new housing demand in the rising middle class. A more serious risk may lie in the credit markets in that the Brazilian consumer is already highly leveraged. Nevertheless, we find no evidence suggesting more than a temporary slowdown or correction of home prices.

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