Why real estate prices hit the highest 18-year high in the world

Canadian Prime Minister Justin Trudeau announced last month that foreigners would be banned from buying property in the country for at least two years. The move is an attempt to stop rising prices, which have become prohibitive for many Canadian families.

The problem is not unique to the country, but a global trend — including in Brazil. And it is, in a way, a side effect of the Covid-19 pandemic, which ended up mixing at least three ingredients that favored demand in the real estate market.

The drop in interest rates used to cushion the impact of the health crisis on the economy made financing cheaper. Lockdowns and travel restrictions favored the accumulation of savings by the upper classes, who were unable to travel or attend bars and restaurants. Remote work, in turn, has awakened in many people the desire to take care of the house, to live in a larger, more comfortable space, and even far from the chaos of big cities.

In the United States, the jump in home values ​​over the past two years has raised fears that a new housing bubble could be brewing – bringing back the bitter memory of the 2008 financial crisis.

The topic was even the subject of a study released by the Federal Reserve (Fed, the American central bank) of Dallas, which warned of the risks in this regard.

Portugal also sees the rise in prices with fear. The value of real estate in the country had been growing at least since 2014, especially after the entry into force of the “golden visa” policy, which opened the possibility for foreigners who buy a property in the country to apply for Portuguese nationality.

The dynamics of the pandemic has deepened the rise in prices and has made it difficult for many Portuguese families to have access to their own home.

Biggest rise in 18 years

The last quarter of 2021 marked the biggest increase in 18 years in real estate prices tracked in 150 cities by the Knight Frank consultancy, specialized in the real estate industry and with more than 500 offices around the world.

According to the latest report by the Global Residential Cities Index, which is published on a quarterly basis, the average value of homes sold in the surveyed locations grew 11% year-on-year, the highest percentage since the fourth quarter of 2004.

Among the 150 cities that make up the sample, 140 registered high prices, against 122 in 2020.

Istanbul, Turkey, is at the top of the list, with a significant increase of 63% in property values. The first three positions, by the way, are occupied by Turkish cities — Izmir comes in second (58.5%) and Ankara, in third (55.9%).

The country, however, is a different case. Turkey is mired in an economic crisis marked by the highest inflation in two decades. In 2021, the official price index rose 36.1%, and continues to accelerate. In April of this year, the high accumulated in 12 months reached close to 70%.

In the United States, the city with the biggest jump in prices was Phoenix (32.5%), which occupies the 5th place in the ranking, followed by Miami (27.4%, 8th position), Dallas (26%, 9th position) and San Diego (25.4%, 10th).

São Paulo and Rio de Janeiro, the Brazilian cities that make up the index, are at the bottom of the list, in 121st and 129th positions, respectively, with increases of 4.4% and 2.2% in prices.

‘Boomerang effect’ of the pandemic

Part of the price increase seen at the end of last year is also due to a kind of renaissance in cities observed after almost two years of the pandemic, adds the head of international residential research at Knight Frank, Kate Everett-Allen, in an interview with BBC News. Brazil.

After the first lockdowns, in the richest countries many people left large urban centers and, with the mobility provided by the home office, moved to smaller cities or even rural areas.

At the time, questions were raised about what the future of cities would be – whether they would see, for example, a significant exodus of their inhabitants.

“But since the spring of 2021, about a year ago, we started to see a lot of people returning to cities in search of connectivity, culture, theaters, restaurants”, comments Everett-Allen, referring especially to rich nations outside Asia. On the Asian mainland, in places like China, Hong Kong and Singapore, most people stayed in big cities.

“Here in London, there are people who bought a second property in the countryside, for example, and today, with hybrid work, they start to use it in the home office for part of the week, while they spend the other days here”, she illustrates. .

The resumption of tourism – and student exchanges – has also contributed to pushing prices up in some regions, including Australia and New Zealand.

Dream of the furthest home

The general wave of price increases has reduced the chances of middle class and poorer families to acquire their first home in several countries. This problem has already attracted the attention of governments such as Canada, which decided to bar the purchase of real estate by foreigners (although many analysts believe that the measure should not have the expected effect).

South Korea, which has been grappling with an overheated housing market for some years, has launched a series of measures to try to stabilize prices, including new restrictions on borrowing.

“Apart from a few occasional cases, there were few announcements of intervention measures in the past year”, ponders Everett-Allen. “We should see more this year.”

What to Expect in 2022

The interest rate hikes that have been observed in most countries to try to control the high inflation that has marked 2022 should help to slow down price increases.

As it depends on medium and long-term financing, the real estate market is, in general, quite sensitive to fluctuations in interest rates. As financing becomes more expensive, demand tends to fall – and, in some cases, this movement can lead prices to stabilize or even reduce.

The issue, in this case, is that even if prices rise less, the problem of access to housing for the poorest families persists or may intensify, as loans become more expensive.

In a long report on the property market released last April, the British consultancy Capital Economics highlighted that the OECD indicator that relates the price of real estate as a proportion of household income – which, in practice, reveals how affordable or not prices are for families – reached the highest level at least since the year 2000, above even the last peak, in 2007, on the eve of the global financial crisis.

In the text, economists Vicky Redwood and Andrew Burrell point out, however, that it is quite unlikely that the new wave of interest rate hikes will trigger a global financial crisis similar to that of 2008.

The rise in prices over the last decade and more recently, they argue, has not been accompanied by a relaxation of lending – one of the factors that catalyzed the crisis in the US housing market at the time.

In Brazil, the middle class and the poorest will be most affected

In Brazil, the real estate market experienced a boom in the years 2020 and 2021, fueled, in part, by the same dynamics of the pandemic that favored the real estate market in a global context.

The basic interest rate, currently at 12.75%, reached a historic low of 2% in March last year.

“The Selic at a minimum level had a double effect on the real estate market”, points out Ana Maria Castelo, project coordinator for the construction of the Brazilian Institute of Economics at the Getulio Vargas Foundation (Ibre-FGV).

“On the one hand, low interest rates made investors seek greater profitability for their financial reserves. [o que favoreceu o investimento em imóveis]. On the other hand, credit continued to expand, but now at historically reduced rates.”

“There was an important shift of resources to the real estate market, both for families and investors”, he adds.

Property prices in Brazil recorded in 2021 the highest increase since 2014.

According to the researcher, there is, however, no public data available that can indicate how much of the increase was generated by a demand from families and how much by the movement of investors who decided to buy real estate in search of greater profitability.

According to the General Index of the Residential Real Estate Market (IGMI-R/Abecip), last year real estate prices in the country had a jump of 16.25% compared to the previous year, a percentage even higher than the inflation of the period, of 10.06 %. The city with the highest price increase was São Paulo, with a significant 21.09%.

Made in partnership with Ibre-FGV, the index covers ten capitals and takes into account not the advertising prices, which sometimes do not materialize, but the final negotiated values ​​of the properties.

The scenario for 2022 is different. With rising inflation in Brazil and worldwide, construction companies are facing a significant increase in input costs. On the one hand, the cost to build has increased, while, on the other hand, the space to pass on the rise to prices has decreased, with the loss of purchasing power of consumers and the context of high unemployment.

The impact of this combination on prices is still difficult to predict, but it should reduce households’ appetite for new releases.

“The most expensive credit will take a large percentage of families out of the market”, evaluates the economist at Ibre-FGV.

According to Castelo, the negative impact should fall especially on the poorest – who were previously covered by tier 1 of the Minha Casa Minha Vida program and ended up staying out of Casa Verde Amarela, the housing program of the Bolsonaro government – and the middle class.

Families covered by the MCMV range 1 did not pay interest on the property financing and could apply for subsidies that covered a relevant percentage of the price of the house. At Casa Verde Amarela, the first tier provides for interest rates that start at 4.25%.