By FERNANDO NOGUEIRA DA COSTA*
The secular concentration of immobilized wealth is one of the explanations for the non-development of a capital market economy here.
The most traditional way of maintaining wealth in Brazil is real estate. This type of enrichment came to light recently with the revelation of the laundering of dirty money by a “family” with the purchase in “cash money” of 51 of the 107 properties appropriated by diversion of public funds to pay parliamentary advisors.
On September 18, 1850, Emperor Dom Pedro II signed the Land Law, through which it was decided to divide the countryside into large estates, rather than small properties. Even today, only 0,7% of properties have an area greater than 2 hectares (20 km2), but they together occupy almost 50% of the Brazilian rural area.
This secular concentration of immobilized wealth is one of the explanations for the non-development here of a capital market economy, thriving like the North American one. There, the “American dream” of immigrants being able to “make America” through the conquest of land by genocide of the natives provided enough resources for many investors to buy shares in large publicly traded corporations.
Equity since 2000 has increased while interest rates have fallen due to the worldwide deflationary trend brought about by the globalization of trade with the new international division of labor and demographic trends. The McKinsey consultancy analysis – The rise and rise of the global balance sheet [Endless Rise of the Global Balance Sheet] found a strong inverse correlation between five-year moving averages of equity and nominal interest rates after 2000.
Real estate assets illustrate the basis of valuation gains and their relationship to interest rates. Property prices increased, approximately tripling on average across the ten countries in McKinsey's sample, from 2000 to 2020.
However, there was not always the expected impact of a higher rental income, given its proportion in relation to the value of the property, evaluated as an opportunity cost of immobilizing that capital instead of selling it to obtain liquidity for financial investments. In some places, this expectation was reversed due to the sharp drop in rental income.
Rental yields declined in these cases when falling interest rates impacted borrowing costs. The fall in interest rates played, in other cases, a decisive role in the increase in property prices, due to the flight from fixed income to variable income and, especially, in betting on the firm upward trend in property prices to be resold and provide capital gains.
The inelastic supply of land on urban land in metropolises also played a role, otherwise one would expect rents to fall as interest rates fall, rather than property prices rising. Australia, Canada, France and the United Kingdom saw the highest growth in residential property values relative to GDP.
Of the equity gains linked to real estate globally, around 55% derived from higher land prices, while 24% was attributed to higher construction costs. The remaining 21% was the result of net investment, that is, building new homes or improving existing ones.
According to McKinsey, half of the growth in household net worth came from rising stock valuations, particularly in China, Sweden and the US. Another 40% came from the increase in property valuations.
Housing values in Australia, Canada, France and the UK grew by more than a full multiple of GDP. Households' net worth also grew as a result of increased deposits leaked to them, due to the creation of cheap money and stimulus measures (“monetary easing”), however, debt in the housing sector remained relatively stable relative to GDP.
In short, there is a scenario approaching where the long period of divergence between low inflation and interest rates and high asset prices may be coming to an end. It is possible that high asset prices will eventually reverse to regain their long-term relationship to GDP, i.e. greater stability in the relationship between stock value and income flow as has happened in the past.
Increased investment in post-pandemic recovery, the digital economy or sustainability could change the savings-investment dynamic. The resumption of inflation could put pressure on the extraordinarily low interest rates in effect around the world until the pandemic, before the breakdown of global value chains, both productive and commercial.
This would lead to a decline in the market values of real estate assets. They have sustained the growth of global net worth over the past two decades.
It is worth asking: is it healthy for society that high house prices, instead of investment in productive assets, are the engine of economic growth? Is this buying and selling of private property on stock of wealth not unproductive, built mainly from price increases on existing wealth?
Affordable housing, especially, has become a cherished demand for Millennials. Its young people cannot afford to buy homes and start families as early as in previous generations. This fuels rent inflation.
In Germany, there is an ongoing grassroots campaign to take control of large residential rental properties and turn them into public ownership. In the Netherlands, the idea of prohibiting investors from buying low-cost houses to exploit the lease is debated.
In Seoul, South Korea, there was a 90% increase in the average price of an apartment and housing in basements in basements subject to flooding and the deaths of families became a national shame. Chinese leader Xi Jinping has made affordable housing an important rallying cry in his campaign for general prosperity by declaring “houses are for living in, not for speculation”.
And here, in Brazil, simply, misgovernment changed the name of the Minha Casa, Minha Vida program and emptied the social subsidy budget. Affordable housing is the most pressing economic issue for the social mobility of the poorest.
The mobility enabled by digital technology and the increasing flexibility of face-to-face work in the post-pandemic era can alleviate some of the pressure. This is in case there is an escape of the inhabitants of the metropolises to smaller cities.
The demand for residential properties is strongly impacted by three factors: (i) demography; (ii) household income; and (iii) real estate credit. On the one hand, demographic trends are changing, on the other hand, income and credit are more volatile in different phases of the economic cycle.
The job market in the pandemic aggravated the deterioration of employment and the purchasing power of the population, negatively affecting the dynamics of the real estate market. Also the deterioration of real estate credit conditions, after April 2013, previously abundant and relatively cheap, reversed the financing and the tree real estate.
In terms of purchasing power, most (66%) of the respondents to the Raio X FipeZAP+ survey, in the 2nd quarter of 2022, declared having a monthly household income equal to or less than R$10.000.
In terms of objective, a majority, but increasingly smaller, portion of buyers (down from 67% at the beginning of 2019 to 55%) declared their intention to use the property as a home, while the rest (45%) classified the purchase of the property as as a form of investment. Among those opting for this purpose, the interest in obtaining income from renting the acquired property prevailed (81%) to the detriment of appreciation for resale (19%).
Among the respondents with the intention of acquiring real estate in the coming months, 88% of the respondents stated that they intended to use it for housing, in particular, with the purpose of living with someone (82%). Living alone was 15% and 3% buying for someone else to live in, that is, to be given away.
The opportunity cost for investors in Campinas is remarkable: from Jan 2013 to Nov 2019, the variation of the FIPEZAP Sales Index accumulated 31%, while the CDI varied 91%. In São Paulo, given the real estate speculation, from Jan 2008 to Nov 2019, the variation of the FIPEZAP Sales Index accumulated 243%, while the CDI varied 212%.
Returning to the issue of buying property for money laundering, the question arises: if a corrupt person appropriates cash from others, what is it for? Not for putting in boxes. It is to enjoy, for example, living in a luxurious mansion. This symbol of enrichment is attractive to the criminal. He seeks social ascension. Only.
*Fernando Nogueira da Costa He is a full professor at the Institute of Economics at Unicamp. Author, among other books, of Support and enrichment network. Available in https://fernandonogueiracosta.wordpress.com/2022/09/20/rede-de-apoio-e-enriquecimento-baixe-o-livro/
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