The real estate market in Brazil in anticipation of major sporting events

Expectation of a "bubble" After the crisis period of the 1990s, the Brazilian real estate market began to gradually recover since 2002. The steady decline in mortgage interest rates each year has stimulated the demand for real estate purchases. An important effect on the real estate market was made by the state program to reduce poverty among the population and stimulate the growth of the middle class. Already in 2011, about 54% of the country's population fit into the “middle class” category, while in 2004 this figure was 34%. This population makes up 46% of the total number of property buyers in the country, according to the Ipsos Research Institute. In 2007, the Brazilian FIFA World Cup was announced. Two years later, it became known that Rio de Janeiro would host the Summer Olympics in 2016. This has led most agents in the Brazilian real estate market to anticipate a sharp jump in price levels. According to the country's main rating agency Fipe-Zap, between 2009 and 2012, prices in Sao Paulo and Rio de Janeiro increased by 159% and 194%, respectively. In 2009, prices in Sao Paulo increased by 21.6%, in 2010 - by 24%, in 2011 - already by 27%. In 2012, the growth rate slowed down, amounting to 15.8%. In 2013, the price increase was even less - 13.9%, which was the lowest annual increase since 2008. The highest rate of growth in prices in Rio de Janeiro was recorded in 2011 - 34.9%. However, already in 2012, the indicators of the price growth rate decreased by more than two times, amounting to 15%. In 2013, property prices in the city increased by only 13.9%. According to most experts, the sharp jump in prices in recent years was largely stimulated by the decline in interest rates in the country to historic lows. President Dilma Rousseff is actively injecting finance into the real estate market using government assets. To improve housing affordability, Rousseff decided to reduce the mortgage rate to 5% for families with a budget of less than 1,600 Brazilian reais per month ($ 714). In turn, banks began to issue funds on more favorable terms, increasing the maturity of loans. Despite government measures, the level of real estate deficit is growing - the shortage of housing in 2011 was estimated at 8 million units, while in 2005 the amount was 6.4 million units. According to the most recent data from the Fitch agency, most of the real estate is available to the general public only under the condition of a high credit burden and long repayment periods (up to 35 years). Yale University professor and Nobel laureate Robert Schiller believes that the pace of the economy is far behind the growth of prices in the real estate market. Another reputable analyst, Neil Schering of the independent research firm Capital Economics, believes that the real estate market in Sao Paulo and Rio de Janeiro is currently overvalued by at least 50%. The Effect of Major Sporting Events Hosting the FIFA World Cup means investing in infrastructure, including transport, building and improving airports, and maintaining a high quality workforce. This means a significant increase in the quality of life, which cannot but affect the real estate market. World Cup matches will be held in twelve cities: Belo Horizonte, Brasilia, Curitiba, Fortaleza, Goiania, Manaus, Natal, Porto Alegre, Recife, Salvador, Sao Paulo and Rio de Janeiro. The choice was dictated by the fact that all these cities are important regional centers, so that the effect of the championship will be most fruitful for the country as a whole. However, it should be expected that the greatest effect on the real estate market will be observed in the two largest cities in Brazil - Sao Paulo and Rio de Janeiro. Market professionals believe that hosting the 2014 FIFA World Cup and the 2016 Olympics in Rio de Janeiro will certainly have a positive impact on the Brazilian property market, especially in Rio de Janeiro. Infrastructure development, timed to coincide with two major world sporting events, is actively attracting the country's population to the city. In the recently published study “The Effects of the 2014 World Cup in Real Estate Market in Rio de Janeiro and So Paulo,” researchers from the University of Fluminense analyzed the rise in real estate prices in So Paulo and Rio de Janeiro in response to world sporting events. The study notes that a total of 32 large projects with more than 400 infrastructure improvements worth $ 1.1 billion are preparing for the World Cup in both cities. At the same time, Rio de Janeiro will be in a more advantageous position in the future, since the city will also be the capital of the 2016 Summer Olympic Games. Comparing the growth of real estate prices and rental prices, scientists come to the conclusion that the growth in real estate prices is not due to an increase in demand, but rather speculative overestimations. Rio de Janeiro is more subject to the effects of sporting events, therefore real estate here is more overvalued. The government's program to provide affordable housing to the population in recent years has been threatened by rising prices in connection with the World Cup and the Olympics. According to experts, high prices are fueled by the costs of developers associated with land speculation. In addition, many construction companies that have received government subsidies to build affordable housing are instead building expensive real estate. The demand for real estate purchases is decreasing compared to the peak in 2011. At the same time, the average rental income has been steadily declining over the past years. If in 2009 the average rental income in Rio de Janeiro was 7.8%, then in 2011 this figure dropped to 4-5%. The study notes that there is an inextricable relationship between the value of real estate and the size of rental income. When this connection breaks, and the value of real estate reaches a critical level in relation to the cost of rent, supply prices begin to fall sharply, and the speculative bubble bursts. Daniil Burygin HomesOverseas.ru