Note two saliencies peculiar to the tracking of Brazilian property prices and to Brazil's sole property price indicator. That is, compared with information sources and indices in developed economies (bolded, below):
Is Brazil´s Only Property Price Indicator an Accurate Measure of the Reality?
Being the prominent reference used by specialists in the Brazilian property sector as well as the media, the Fipe Zap measure has continued to broadly indicate patterns which seemingly contradict the general market sentiment (see the August 2012 factfile update by clicking here). For instance, based on measuring the average price per metre square in seven of Brazil´s prominent urban regions (São Paulo, Rio de Janeiro, Brasília, Belo Horizonte, Fortaleza, Recife and Salvador), the index affirms that between January 2008 and July 2012 there were price rises of 140.9% and 175.2% in São Paulo and Rio de Janeiro respectively.
As a result, since its creation in 2008 (reasonably close to the initial stages of the Brazilian property boom), such figures have been called into question in relation to accuracy and credibility. A series of questions were recently put to FipeZap coordinator Eduardo Zylberstajn in the Construction Market (Mercado Construção) magazine – the most salient points of which have been highlighted below (along with Ruban Selvanayagam´s own comments):
- When asked about the disproportionate relationship between the price growth that the FipeZap demonstrates and the much slower evolution of Brazilian income levels – Zylberstajn confirms that the question has intensified in recent years, using the example of São Paulo where between 2008 and 2012 incomes rose by 13.5% but house prices by 87.9% in real terms. He goes on to argue that it has been the unprecedented growth of credit that has fuelled these patterns; Brazil witnessed a number institutional reforms at the start of the century which triggered the ability for banks to offer longer payment periods and lower interest rates (the average rate, according to the Brazilian Central Bank fell from 20% in 2006 to 11% today and, over the same period, the average repayment term grew from three and a half years to 13 years today);
- He pointed to the fact that, despite the improvement in the ability to finance, accessibility to housing has not changed since 2008;
- He believes that the key to knowing what will happen to the Brazil property market lies in its relationship with the credit sector – if, for example, wholesale credit supply continues to decrease, instalments will subsequently increase thereby directly forcing prices to also decline.
- When asked about the situation in which further rate drops could force prices even further upwards, Zylberstajn commented that "the drop in rates from 20% to 11% caused this movement in prices. If the fall is from 11% to 10%, or 10% to 9%, which is what we are currently witnessing, the impact is a lot less";
- On the property bubble, he admits that there are areas such as the Federal District, Rio de Janeiro and São Paulo where prices are "slightly outside reality" – yet he affirmed that the 50% drop [a recent estimation made by Capital Economics] will not happen;
- However, what has been witnessed is that prices have been decelerating from an average 2% growth (across the seven cities) during mid-2011 to 1% in the last few months;
- Zylberstajn also pointed to the fact that the index is based on price per square metre and therefore if this figure doubles but the area of the housing unit falls, the price that people are going to pay will remain the same. It can be seen in most of the larger metropolitan regions of Brazil that average size of property for sale has generally become smaller: "there is a clear loss of quality being offered to the consumer," he commented;
- When questioned in relation to the fact that the index measures asking (and not sold) prices, Zylberstajn responded that when looking at month-to-month variations, there could well be higher or lower discounts between values offered – but examining at broader price patterns of over 3 or 4 years provides a comfortably accurate perspective;
- Another important point is made in relation to the dependence of statistics from registry offices (cartórios) which Zylberstajn rightfully points out are often misleading due to registered prices often being very different to the sale value in addition to the fact that such data is less accessible in compared to the FipeZap. He points to the example of the Spanish property portal "Fotocasa" which anticipated the appearance of the country´s property bubble four months prior to the official measure (due to the fact that the latter statistics do not get officially published until all the relevant sales procedures have been accomplished). He nonetheless admits that having multiple indices operating in the market place is certainly a better way to analyse the market more objectively – there are Brazilian residential property measures in the process of formation, for instance via the Caixa Econômica Federal (based on mortgage finance statistics) and the Getúlio Vargas Foundation (although no release dates have been confirmed as yet);
- Zylberstajn also responds to criticism that the index does not account for new properties on the market: "Let´s say that the prices of new properties were double those of resale properties or vice versa – people would simply buy whatever is cheapest [there could therefore never be too much of a gap]. For this reason, if over four years the prices of resale properties increased by 140%, the rise in new home prices should not be much different". FipeZap are also in the process of developing an index for new build properties but Zylberstajn admits that it has been a difficult task as a result of incoherent data within this segment;
- Commenting on the small sample sizes in some of the cities analysed by the index, Zylberstajn commented that the organisation is planning to correct such discrepancies via complementing this data with other sources;
- Zylberstajn finally comments on the fact that the index does not accompany the same property over a period of time and that there is high amount of congregation of stock of various ages and standards: "We adopt a process of stratification. In São Paulo, for example, we divide the city into 204 areas – each of which is further split according to bedroom quantity (as an average) and price averaged into cells. The implicit assumption is that the composition of the cells does not change in the long term. If every month there was a large transformation in the stock composition in each area, then there would be a problem – but this does not happen. We receive a lot of criticism but no one has actually been able to demonstrate that we are wrong in our calculations, pointing to what would be the correct average price."
Ruban Selvanayagam´s comments: the level of knowledge of the intricacies of the Brazilian property market was well demonstrated by Eduardo Zylberstajn in this interview. By no means perfect, the index has nevertheless made some important steps forward since its formation in 2008 and – with it being notably tricky to provide a truly objective analysis with so many variables involved – it is pleasing to see that there are professionals working towards providing more sophisticated breakdowns of the realities.
However, the main disagreement I have is in relation to the severity of the impending price drops. Whilst Zylberstajn is right in pointing to the fact there 1.5 million new families in Brazil looking for housing every year, it makes little difference if the vast majority have little chance of getting on the ladder due to a simple lack of affordability. A simple look at the demographic landscape of urban Brazil demonstrates that the majority of this figure is located within the low income bracket. The catch-22 situation here is that the Brazilian banks are not going to create themselves a sub-prime situation and lend on property that is beyond the means of the borrower. Therefore it is only via a noticeable drop in prices (which, when using FipeZap statistics, is likely to around the 50% point – if not more) that sustainable and demand-based real estate growth will be able to be achieved.
