Real Estate Prices In Brazil Have Spiked 200 Percent Since 2008 -- Is The Bubble About To Burst?

For most of the world, 2008 was a down year. Markets plummeted, currencies melted and, particularly in Europe and the U.S., real estate bubbles burst. But not in Brazil. The South American country is still enjoying a real estate boom, which is going strong after five years of expansion, with prices countrywide up 200 percent since 2008.

In São Paulo, for example, in the university district of Perdizes, five years ago, a 1,300 square feet (120 square meter) apartment sold for 330,000 reais ($144,000). Today, the same place is worth 900,000 reais ($390,000) -- 170 percent increase. Cases like that are repeated all over the country.

According to the FipeZAP Index, which follows the prices of Brazilian housing for sale or rent, real estate prices have climbed 230 percent in Rio de Janeiro since 2008. For São Paulo, the rate is 188 percent. According to real estate Élite International Realty, an apartment in any of those two cities could be up to 60 percent more expensive than Miami.

Brazil would seem to be following in the steps of the U.S. and some European nations, where real estate crashes helped bring a global economic downturn. But the Brazilian situation is different: There may be a price bubble, but credit for home loans is far tighter.

In the U.S., many loans were at low introductory rates, then reverted to higher interest rates, and homeowners were not able to meet payments. High-risk subprime mortgages were traded on the financial markets, with buyers of those securities only finding out later about their real risk.

Brazil, however, learned from the northern countries’ mistakes. South America's biggest economy, which had its share of financial drama in the 1990s, has very high requirements for granting mortgages. Loans are only given to those who can prove that making the monthly payments will not require more than 30 percent of their income. Today, only 20 percent of the population has mortgage debt.

Mortgages are equivalent to 7.9 percent of Brazil’s GDP as of August 2013, up from 6.8 percent in 2012. In the U.S., on the other hand, mortgages represented 76.1 percent of the country’s GDP in 2011, and in the U.K., the rate was 80 percent in the same year.

Nevertheless, several entities have warned of an increase, however slow. Chilean business analysis firm BN Americas estimates that mortgages could account for 20 percent of the country's GDP in the next decade. A report by London-based Capital Economics said the credit expansion "has uncomfortable echoes of the boom experienced by much of the developed world prior to the 2008 global financial crisis."

Real estate agencies in Brazil say, not surprisingly, that the spike is not a harbinger of doom. "We mistake a price bubble with a credit bubble. The fact that prices are on the rise does not mean that our credit situation is unhealthy,” said Celso Petrucci, executive director of Sindicato de Vivenda de São Paulo, or Secovi-SP, an association of real estate agencies, to Spanish newspaper El País. “There was a deficit in construction for 20 years. Until 2005, Brazilian young people could not buy a house,” he said. “Today, 74 percent of loans are to first-time buyers.”

Nobel Prize-winning economist Robert Shiller, a housing expert who visited Brazil in August, told Brazilian website Infomoney that he would be careful. “I cannot say that there is a bubble, because I do not know the characteristics of the market. But comparing the data with what previously happened in other countries, all I can say is proceed with caution,” he said.