Housing boom finds 190 million new customers

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The world's next great housing boom may be taking shape in Brazil. The missing ingredients are a full-fledged mortgage market - one that steers clear of the pitfalls the US encountered - and sound government policy.

Construction sites dot the landscape throughout the vast country of 190 million. In fact, Caixa Economica Federal, Brazil's second largest federally controlled bank, is hiring a satellite-imaging company to monitor work on thousands of buildings financed with Brazilian government money.

The key drivers of the activity are both economic and political. There's no doubt Latin America's biggest economy is coming out of a recession as the nation's benchmark interest rate was cut to a record 8.75 percent last week. Credit is flowing more freely as bank lending expands at the fastest rate this year.

Mostly, though, the hot real estate market is fueled by political forces rather than economics. In March, the Brazilian government adopted "Minha Casa, Minha Vida- - "My Home, My Life" - a 34 billion reais (US$18 billion) program to build 1 million homes for low-income families.

Under the new program, families earning as much as 4,200 reais a month will be able to buy a home at a near-zero interest rate, refinance it over 36 months in case of unemployment and be fully bailed out by the government in case of death. Meanwhile, a mortgage for a middle-class Brazilian can carry an effective interest rate of more than 13 percent with no comparable breaks.

This housing plan, along with tax cuts for selected building materials, originally was part of a broad policy to counter the impact of the global financial crisis on Brazil's economy.

Election-year handouts

With the economy already rebounding, the subsidy's main impact will be its role in next year's presidential campaign. President Luiz Inacio Lula da Silva hopes the plan will attract votes for his Workers Party candidate, Dilma Rousseff. Lula used another government subsidy - Bolsa Familia, a cash transfer program to the poor - to help his re-election in 2006.

The four-month old "Minha Casa, Minha Vida- program is just getting off the ground. Yet, the government's support for it is already encouraging real estate development, creating thousands of construction jobs and boosting the local stock market.

The nation's civil construction businesses employed 27 percent of all workers formally hired in the first half of the year, according to the labor ministry. Meanwhile, the country's manufacturing industry lost 144,000 jobs.

Homebuilders rally

While the Bovespa Index is up 43 percent this year, the two largest Brazilian homebuilders, Cyrela Brazil Realty SA and Gafisa SA, have more than doubled. Shares of Construtora Tenda SA, which serves the lower end of the market, have quadrupled this year; Gafisa purchased a controlling stake in the company last year.

But the potential for Brazil's real estate market beyond the government program is stunning. Mortgage lending represents only 2.5 percent of the country's gross domestic product, according to the central bank. The comparable figure is 11 percent in Mexico, 20 percent in Chile, 45 percent in Germany or Spain and 68 percent in the US.

In the last 12 months, the worst period of the worldwide credit crunch, mortgage lending in Brazil rose 41 percent, twice as fast as consumer credit.

So Brazil's real estate market has nothing but rosy days ahead, right? Not quite.

The Brazilian banking system is healthier and less leveraged than in the US. The problem is that mortgage financing is dominated by public banks. Government institutions control 73 percent of outstanding mortgage loans, while private banks, foreign and local, split the rest of the market.

Too risky

Private-sector bankers aren't writing many mortgage loans because they view other types of credit as more profitable and returns on mortgage transactions still aren't commensurate with the risks of late payments and default. Brazilian consumers pay interest rates that average 45.6 percent on most financed purchases, more than triple the rate on mortgages.

Politicians, on the other hand, don't seem to care much whether the financing for the government-backed housing plan generates about bad loans. They figure the Treasury will bail them out if needed.

Meddling hands

If Lula and Rousseff put political interests first, they probably will demand construction of more houses than Caixa and other federal banks can safely finance.

Lula has already shown a fondness for meddling in the affairs of the public-sector banks by replacing directors with Workers' Party loyalists. Earlier this year Lula fired the head of publicly traded Banco do Brasil for refusing to cut the bank's interest rates to aid the economy and, in turn, Rousseff's election prospects.

Brazilian authorities have come a long way toward developing the mortgage market. Still, a lot remains to be done. One key change: encourage private banks to participate by allowing them to negotiate loan terms and interest rates with home buyers. Currently, government legislation stipulates the characteristics of 80 percent of the contracts.

Without getting the private sector on board, the risk of taxpayer money being used to bail out federal banks will mount, risking a repeat of Brazil's 1980s subprime debacle. Back then, government subsidies created a mortgage liability equal to 150 billion reais, which Brazilians will be paying for until 2027.

It might take more than advanced imaging satellites to keep this boom from going bust.

By Alexandre Marinis*

* Alexandre Marinis, political economist and founding partner of Mosaico Economia Politica, is a Bloomberg News columnist. The opinions expressed are his own.

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