High interest rates deprive 2 million families of their ability to acquire property

The fall in the basic interest rate, the Selic, as of the second half of 2019 brought with it a reduction in the cost of real estate credit, allowing more families to have access to their own home or even purchase a larger property.

The Selic, which was at 6.5% until then, started to fall from July of that year, reaching the historic low of 2% in August 2020 during the crisis caused by the pandemic, also lowering interest rates on financing.

Since March 2021, however, the Central Bank has promoted a series of increases in the Selic, up to 9.25% currently —with a further increase forecast in 2022— to fight inflation. And just as the fall in the basic rate reduced the interest on real estate credit, its increase took away from a significant portion of the population the financial capacity to acquire a property over the past 12 months.

The country’s five large banks raised interest rates on the most traditional credit for home ownership by 1 to 2 percentage points in the period, to levels close to 9% a year. The rate is also added to the TR (Referential Rate, common in financing), which was zero, but which increased with the rise in the Selic rate.

According to Alberto Ajzental, coordinator of the Real Estate Business Development course at FGV (Getulio Vargas Foundation), for every 1 percentage point increase in the total effective cost (CET) involved in contracting a loan, about 1 million families lose their capacity of acquiring a property.

“The high Selic rate leads to an increase in the CET, which causes this impact on demand, especially at the base of the pyramid,” he says.

With the increase of up to 2 percentage points observed in the rates practiced among the main financial institutions, therefore, around 2 million families lost conditions to take on real estate financing throughout 2021, points out the specialist.

Ajzental adds that the data does not consider high levels of inflation and unemployment, which further corrode the population’s purchasing power and also weigh negatively on demand in the sector.

​According to Santander, real estate financing operations hit a record in 2021, either because of the still low interest rates compared to previous years, or because of repressed demand, in addition to the increased interest in larger properties and outside the large centers that aroused in the pandemic.

But the bank projects that the scenario will not be repeated. “Next year, not all of these factors will be observed and, therefore, the same volume carried out in 2021 should not occur”, says Santander.

Data from Abecip (Brazilian Association of Real Estate Credit and Savings Entities) already point to a slowdown — real estate financing with resources from the books of the Brazilian System of Savings and Loans (SBPE) totaled BRL 17.16 billion in October, a drop of 3.9% compared to September.

José Carlos Martins, president of the CBIC (Brazilian Chamber of Construction Industry), says that the increase in commodity prices and, consequently, in the intrinsic costs of the civil construction sector, weighed even more than the financing rates in the pockets of potential buyers.

“About 70% of buyers use their purchasing capacity limit when making a loan. Therefore, an increase in installments makes many sales unfeasible”, says Martins.

He adds that, as the source of funds for real estate financing comes mostly from savings deposits, the investment yield —today at 6.17% per year plus TR— ends up serving as a parameter for banks in the collection of fees.

According to the president of CBIC, historically, the spread charged on the income of savings in the modality usually fluctuates around 3 percentage points.

“In this sense, it will no longer be so important for interest rates on financing if the Selic continues to rise from now on,” says Martins.

In any case, the tightening of financial conditions in the real estate sector has already entered the BC’s radar.

The monetary authority highlighted in a recent publication to be attentive to the advance of delinquency and of assets considered to be of greater risk. In particular, in the case of financing with FGTS resources aimed at the lower-income public.

“There has been a relevant increase in the materialization of risk for loans with resources from the FGTS (Guarantee Fund for Employees). The problematic assets of this line have increased significantly since the end of 2020. In addition to the increase in defaults throughout 2021, the volume of restructurings does not drop significantly, as observed in other lines, indicating a possible worsening in the payment capacity of borrowers in that line,” says the authority in a financial stability report published in October.

BC data show that the default rate on loans taken based on FGTS resources reached 2.45% in September 2021, compared to 1.69% in December last year. The volume of problematic assets went from BRL 25 billion to BRL 29.3 billion.

Also according to BC’s analysis, the increase in problematic assets in the window between June 2020 and June 2021 occurred mainly for borrowers with income below two minimum wages.

The president of CBIC also states that, with the increase in the Selic rate and the income from low-risk investments in fixed income, many families end up postponing the decision to buy the property.

Martins assesses that, for those interested in taking on financing, the time is still positive. This is because the increase in costs caused by the global rise of raw materials, he says, has not yet been fully passed on to final prices at sales counters.

And if inflation remains under pressure for a while, an additional readjustment is likely, points out the specialist.

Ajzental, from FGV, has a slightly different view. For him, the most recommended would be to wait at least until the middle of the first half of 2022 before assuming a very long-term commitment.

The specialist claims that market expectations point to a significant slowdown in inflation in the coming months, which could lead the BC to start cutting interest rates at the end of next year.

“Those who take out credit now may be getting close to the top of the rates that will be charged by banks for mortgage loans,” says Ajzental.

Insper finance professor Ricardo Rocha states, in turn, that more than the level of interest charged by the market, those interested in financing a property need to clearly and honestly define their financial capacity in a medium and long term, and assess whether the value you are negotiating the property for is within the budget.

“Those who wait for financing rates to give way run the risk of seeing real estate becoming more expensive if the economy grows”, ponders Rocha, adding that, when the BC reverses its hand and begins a cycle of cutting interest rates, it is possible to do portability to an institution that offers more advantageous conditions.