Fitch: Brazil's Real House Price Declines Likely into 2017

CHICAGO & SAO PAULO--(BUSINESS WIRE)-- Real home prices in Brazil will drop further as the economy remains challenged despite some improvements, Fitch Ratings says. However, some cities' meager supplies of residential property should limit real price declines. Nominal prices will likely remain mostly stable.

Fitch forecasts a 3.3% decline in Brazil's GDP for 2016 with only a modest recovery in 2017 on increases in unemployment, high interest rates and fiscal tightening that will keep demand for residential mortgages low. Weak economic factors were reflected in sales volume declines and average real asking prices, which declined by 9% from October 2015 to September 2016, according to FIPE-ZAP.

High unemployment and interest rates could further the savings withdrawals that have slowed lending. The reduction in savings deposits so far has lowered the lenders' cheapest unsubsidized mortgage funding sources and forced banks to restrict lending while hiking mortgage rates. Between January 2015 and June 2016, outstanding savings deposits declined by 17%. Over the same period, average monthly mortgage lending dropped by twice that amount (35%).

High price-to-income ratios and low rental yields will also continue to pressure residential property prices. Sao Paulo's average apartment costs around 15x the city's per capita GDP. Investing in residential property is unattractive and is unlikely to provide support to prices. Average annual rental yields in Sao Paulo are 4% while long-term government bonds yield nearly 6% plus inflation and mortgage rates average 6-7% above expected inflation.

The housing stocks of most major metropolitan areas in Brazil lag the demand for housing. This supply-demand imbalance should limit property price declines in the mid- to long-term and should last as construction activity is low in the current recession and tight lending environment.

Nominal prices have remained stable since the beginning of 2015. This has helped keep delinquencies low on traditional mortgages. Most Brazilian mortgages are not adjusted by changes in prices and initial LTVs average 70%. This means nominal house prices would have to decline significantly before borrowers lose equity and nominal salaries would have to decline to threaten debt-to-income ratios.

More details on this and other regional housing markets will be available in a forthcoming Fitch report to be available at fitchratings.com on Monday Oct. 31.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Source: Fitch Ratings

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