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Brazil: Mainstream mortgages 'still emerging'

Jaimie Kanwar

Access to mortgage loans is increasing all the time in Brazil...

Brazil is South America's largest economy and the seventh largest consumer market in the world.  Recently Goldman Sachs bracketed Brazil with Russia, India and China as the “BRIC” countries that collectively represent the world's economic future. Thus there are reasons to believe that South America's economic powerhouse of 190m people is starting to be taken seriously on a global level.

A Brief History of the Mortgage Market

Until relatively recently, mortgage lending in Brazil was highly restricted, due to a combination of limited products, chronically high inflation rates and a prolonged financial crises that impacted confidence in the financial market.

But the first steps towards the development of a domestic mortgage market were taken as early as 1994, with the implementation of the economic stabilization plan called Plano Real. This package of measures was the first in a series of actions that the Brazilian government has taken to satisfy the ever-growing housing demand of the Brazilian people.

Mortgage finance companies were first introduced in 1995. They are not subject to any restriction on LTV, interested rate, maximum loan size or how they can fund the purchase of real estate. Despite all this, 10 years later there are only 6 operational lending institutions and the market is dominated by one major player.

Since the 90s the main lender in Brazil has been the Caixa Econômica Federal (Brazil Central Bank) which originates 70% of Brazilian mortgages, financing USD $11.2 bn of Brazils total USD 16bn residential mortgage market.  The remaining 30% is serviced by private and state- owned multi-chartered banks.

Bank financing for home acquisition remains relatively low in proportion to the overall volume of sales and many people instead take up other payment services offered either from the government (for affordable housing) or from real estate developers.

Where next?

There is a severe housing shortage in Brazil, and population growth rates (0.98% in 2008) mean that this deficit will grow from 7.2 million to 12.45 million in the next 15 years. 

Brazil owner occupier rates were 73.7% in 2004, a level which is not thought to have changed significantly in that time.  In 2005, 594,000 properties were sold domestically in Brazil; out of this only 38% were financed with mortgages. 

Banco Santander estimates that with the current growth in demand, more than 1 million homes will be sold each year by 2010, with mortgages accounting for an increasing proportion – up to 60% by that point.

The government of President Lula has devoted to resources to tackle the housing shortage.  His main aims and results were the provision of more funds for the purchase of affordable homes, increase of housing loan-products and making bank finance available that would relieve real estate developers from the burden of lending money and thus exposing themselves to credit risks and additional operation costs.

Diverse products

As interest rates maintain their downwards trend in Brazil, competitors have started to introduce diverse products able to compete with the Caixa Econômica Federal. These retails banks are showing an increasing ability to service ever-larger portions of the population, which will likely result in more widespread use of loan products such as mortgages in the medium and long term.  

With demand for new build property and real estate prices both set to continue increasing in the coming years in line with the country demographic growth, the increasing stability of the local economy and the increasing access to credit, investors and developers operating in the Brazilian domestic housing market should see several years of plenty ahead of them.