It is important to note that residential mortgages in Brazil are relatively new. In fact, until 2006 there was almost no residential mortgage market. The market worked on an effective cash basis due to the lack of credit and legal regulation in regards to creditor rights. Until 2004, most developments in the city were paid for by clients during construction. This severely constrained the size of the market and limited both the size and the type of housing stock. In fact, until 2006 there was an average of only 24,000 launches in the São Paulo area and this was focused almost exclusively on upper-income buyers. The peak number of new launches was approximately 39,000 in 2007.1 This was a direct result of the expansion of credit.
If we look at the residential market before 2006, it was a completely different reality. In fact, developers who started in the period prior to the entrance of mortgages in the market tend to be more conservative. These developers grew up under a system without credit and have maintained strict discipline. The two founders that stand out as models of this conservative management style are Ernesto Zarzur of EZTEC and Elie Horn of Cyrela.
Brazil’s demand story was very seductive. In fact, a very smart institutional investor with incredible success in other Latin American markets entered the Brazil market in 2002. We will not name companies to protect the innocent, but a specific joint venture in Rio De Janeiro in 2002 was not successful due to the lack of a developed mortgage market. The company failed, which greatly affected this institution’s later success in Brazil. However, the same founding operating team executives went on to found a large public developer which, until the market corrected, became a wild success, at least for those smart or fortunate individuals who sold their shares at the right time.
So to be clear, the credit market opening up in Brazil around 2006 changed everything.
Law 10.931/04 and Mortgages Begin
Law 10.931/04, rigorous enforceable lien rights, enacted August 2, 2004, was the game changer for the real estate market in Brazil. A market that only had cash purchases gained mortgages almost overnight. As one can imagine, this greatly expanded the real estate market and increased the value of land, initiating a real estate boom. In fact, if we look at residential launches in São Paulo from 2005 to 2007, we see a significant increase almost immediately.
Perfect Storm of 2006 to 2013 – Surfing the Wave
Brazil enjoyed a very favorable external environment that included the following: one, positive demographics; two, increased credit (probably the most important part of the story); three, long-term mortgages which were a new product in Brazil in 2006; four, a commodity supercycle and solid job and income growth; and five, positive consumer sentiment.
1. The residential unit launch volume increase to 39,000 represents a 58% increase above the average launches until that point. It shows the significant impact of credit on the residential housing market of São Paulo.
.
