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Thursday, December 1, 2022
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Opinion – From Grain to Grain: Five reasons for you not to buy property now

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No matter the type of asset, we cannot bear to see a rise in prices without wanting to buy to take advantage of the wave. This financial behavioral bias is classic. When it comes to a good that we are somewhat familiar with, the bias gains even more strength. This impulse purchase often brings back frustrations. I explain five reasons why you shouldn’t buy real estate now.

The fear of being left out when prices rise is almost uncontrollable. Many bought crypto assets following this bias. Today they just keep the faith that one day the price will return to previous levels. In May of this year, when Bitcoin was trading at $32,000, I warned and explained why prices should fall below $15,000 this year.

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Now I’m going to make another prediction: buying real estate right now will be a bad investment decision for the next two years.

I understand your desire to buy a property. Part of it is explained by the belief that paying rent is throwing money away. But, this might be the best financial decision right now.

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In a macro way, real estate prices fluctuate motivated by some factors, for example interest rate, credit supply and economic growth.

All these factors point in one direction and provide the same recommendation: be patient to wait for the acquisition of your property. If you already have a property and just want to invest in real estate, the recommendation is even stronger.

Let’s start with the interest rate, as it accounts for a large part of price movement.

It boils down to one concept: home prices fall with the cycle of rising interest rates. This is not only happening in Brazil, but all over the world.

The graph above shows the evolution of basic interest rates in the United States (USA) and the Case-Shiller house price index. Note in the circular markings how the interest rate hike was followed by a drop in property prices.

The same effect occurs in Brazil. The Brazilian indicator to follow the evolution in property prices is different from the American one, but it illustrates the same result. The FipeZap real estate index measures advertised prices. While Case-Shiller follows the prices of transactions carried out.

We know that no one wants to advertise the price of a lost property. Thus, the increase in the Selic rate between 2014 and 2016 meant that announced prices remained stagnant from 2015 to 2019. This is shown in the table below, which shows the variation of the FipeZap index and the IPCA since 2014.

Only from 2020, with the sharp drop in interest rates, prices resumed high.

On average, those who bought after the high between 2009 and 2014 are still experiencing a return of 2% per year in eight years.

The increase only occurred from 2020 to 2022, as in the five years between 2015 and 2019 the average return on property prices was 1% over the entire period.

Something similar should happen now, as interest rates should remain high until 2024 and the effect of this increase will be delayed.

I’ll come back to interest rates later on, but first I’ll comment on the other two factors.

The provisions presented in the results of Brazilian banks in the last quarter are a reflection of the indebtedness of families in Brazil. Indebtedness is historically high and late payments are likely to force banks to restrict lending.

Few buy real estate paying in cash. Therefore, with more restricted credit, the demand for real estate should fall and consequently the price.

All that remains is to talk about the economic growth factor before returning to interest rates. It is well known that property prices follow the economic cycle. The drop in GDP in 2015 and 2016 and the low growth in the following years help to explain the fact that property prices did not rise from 2015 to 2019.

Economists expect GDP growth in 2023 to fall to 0.7%. The global slowdown due to high interest rates in developed countries could harm this growth.

Therefore, the economic growth factor puts downward pressure on real estate prices.

Returning now to interest rates, there are two more reasons to justify postponing your purchase. One based on the case that you don’t have the money to buy and need financing and the other on whether you have the money available to pay the property in cash.

Let’s start with the case that you don’t have the money and need a loan. The cost of financing is now very high. The effective interest rate of 10.6% pa charged by banks, added to the TR of 2.5% pa, results in a total interest rate of over 13% pa.

In three years, interest rates should be lower and the cost of this financing will penalize its acquisition less.

Finally, if you have the money available, with the Selic at 13.65% per year and expected to remain above 10% until the end of 2024, your opportunity cost is quite high.

If you postpone the purchase for two years and invest in simple fixed income yielding 115% of the CDI, you will have a yield of more than 30% in this period. This is equivalent to buying the property in two years at a 30% discount.

Lastly, I’ll give you an additional piece of data. Inventories of unsold launches at developers are increasing. Cyrela’s result for the third quarter points to this increase.

So put your fears aside, as the odds are higher that prices will not rise and your money invested in fixed income will be a better investment decision.

Michael Viriato is an investment advisor and founding partner of Investor House

Follow and like De Grão em Grão on social networks. Follow the investment lessons in Instagram🇧🇷

If you have any questions or suggestions for themes, please feel free to send by email.

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Debra
Debra
I have over 10 years of experience working in the news industry. I have worked for several different news organizations, including a large news website like News Bulletin 247. I am an expert in the field of economics and have written several books on the subject. I am a highly skilled writer and editor, and have a strong knowledge of social media. I am a highly respected member of the news industry, and my work has been featured in many major publications.

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