In 2011 it became increasingly apparent that the Brazilian property market is unlikely to escape the ongoing effects of the global financial climate with bearish forecasts pointing to drops potentially reaching as much as 40 percent.
However, the infancy of the sector combined with the relatively strong position of the economy, the sheer size of the country and the lack of reliable house price indices often makes such predictions tricky when looking at the matter objectively.
Nevertheless, despite the unprecedented pent-up demand for real estate, it is arguably the low income sector that remains in a worse than ever position with the large majority of the demographic remaining in favelas or other forms of insalubrious accommodation.
According to the Brazilian Geography and Statistics Institute (IBGE) – in stark contrast with the mid-upper class residential real estate market where prices have now reached comparable levels to those of prime New York, London and Hong Kong – 22 percent of the Rio de Janeiro population still live in favelas, a number that has grown 57.9 percent between 1991 and 2011.
In Belém (Pará) 53.9 percent of the population are in such circumstances, Salvador (Bahia) has 26.1 percent, Recife (Pernambuco) has 23.2 percent and São Luís (Maranhão) has 24.5 percent.
It is also worth noting that several specialists argue that a considerable amount of units that are of bad quality with little adherence to the most basic building standards are often counted as being part of normal stock which, in reality, means that the national deficit could well reach up to 30 million units.
With Rio de Janeiro state statistically having the highest presence of favela communities in the country, late 2010 and throughout 2011 saw the growth “pacification” programs – involving the arrests of key criminals and traffickers – which were widely deemed as a success.
Nationally, such initiatives are being referred to as a fundamental lynchpin in the right direction for dealing with the issue of favelas in light of the growing attention that the country is attracting.
Yet, whilst complemented by impending infrastructure development programs, such as Morar Carioca, there is very little drive towards resolving the degraded housing conditions that many Brazilians are experiencing.
According to urban specialist Marcelo Burgos speaking to the Estado de S. Paulo newspaper (December 25, 2011): “Large collectives of Brazilian populations have a low quality of life, mobility issues and very poor access to communal areas whilst also experiencing high pollution, transport problems and greater incidences of violence.”
The newspaper also mentioned the highly speculative nature of the informal real estate market that exists and spoke to a resident in the largest favela in Rio – Rocinha – who stated she pays a rent of 245 reais (US$ 134) for a 9m² room – a costly figure considering she is taking home the national minimum wage (622 reais – US$ 340 – as of January 2012), leaving her with a low level of disposable income in what has clearly become an inflated consumer market.
Whilst the government should be commended somewhat for initiating the social housing program Minha Casa, Minha Vida (My House, My Life), it is undeniably inflationary pressures that have led to the derailment of its fundamental goals of catering to the affordable sector.
In line with the growth of the real estate market, Brazil’s construction industry input values have escalated disproportionately – particularly the costs of land and key materials.
In addition, 2011 saw a number of issues emerge related to the contracting of building site labor, such as what were seen via the strikes demanding pay rises in Pernambuco, one of the fastest growing regions in the country that forced Brazilian developers to comply or have to deal with even bigger losses.
Other notable concerns include the bureaucracy and cumbersomeness of the main financial administrators – Caixa Econômica Federal – as well as a growing number of false marketing sales tactics which led to a quadrupling of complaints during 2011.
As a result of companies needing to raise their prices in line with such market pressures (in order to achieve a sufficient profit margin), government proclaims of targets being met are simply untrue. Figures often referred to by the government and in the Brazilian press are for projects that have been approved for construction and not completed.
Today, the private construction industry is largely steering clear of accessing the program with not one unit completed for the 1-3 minimum demographic in 2011 and only 3,600 in 2010. Many projects that have been started specifically for the 1-3 minimum salary level have either been stalled or abandoned completely due to cash flow problems.
Companies who have publicly stated their commitment to the sector have, in reality, undergone a change in strategy to cater to a more middle and above income demographic in order to justify higher sales prices. Yet even the largest companies who have the benefits of scale have been running into difficulties.
Tenda, for example, with 30,000 units being built in various parts of Brazil, reported that 11,000 are in some form of complicated situation mainly involving delivery delays (with a handful of projects being 2 years overdue); bureaucratic issues related to registration at the Caixa Econômica Federal and labor contractual complexities.
Speaking to the Brasil Econômico news journal in November 2011, executive director Rodrigo Osmo confirmed that some projects in the first stages of development are being reevaluated and canceled: “We are putting the brakes on – developments completed at up to 20 percent will be considered as to whether it is best to stop.”
With economist Ricardo Torres recently musing over the fact that a kilo of picanha beef is equivalent to a tenth of the country’s minimum monthly wage – how can it be made possible for the huge demand for genuinely affordable housing to be fulfilled?
Dilma Rousseff’s recent statement of the Minha Casa, Minha Vida program being an essential component of protecting the country against the effects of the European economic crisis represents a government clearly out of touch with the housing conditions of the majority of its population.
Perhaps the first stage then is for the country’s leaders themselves to face up to the situation and not concede to illogical pressures such as those being made by the self-interested objectives of the construction industry to raise price ceilings, as was seen by pushing up the maximum limit of the Minha Casa, Minha Vida sales value from R$ 130,000 to R$ 170,000 (February 2011) and increasing the construction sales tax threshold (from R$ 75,000 to R$ 85,000, December 2011).
Such legislation merely serves to drive housing even further out of the reach of those most in need whilst fueling the increasingly growing speculative bubble that has emerged in recent years.
There is also a vital need for the industry itself to think beyond what are often dated methodologies related to how affordable housing is constructed. Professor Vanderley John of the civil engineering polytechnic school of the University of São Paulo (USP) stated in August 2011:
“The bulk of what Brazil produces is still based on technology of a hundred years ago. There have been innovations but the core material has not changed – we need things to be radically innovative.”
Moreover, the industry itself indeed needs to move beyond the “stop-gap” bare bone solutions that are being discussed such as housing microfinance (small loans provided to families to improve their favela units) and understand that the demographic deserves sincere attention in the form of cohesive and long-term answers to core housing needs.
Ruban Selvanayagam is partnered in a low income housing program headquartered in Macaé, Rio de Janeiro – Fez Tá Pronto Construction System (Sistema Construtivo Fez Tá Pronto) – http://www.feztapronto.com.br/. The initiative focuses on providing good quality, environmentally friendly and genuinely affordable housing – representing the only solution to the prominent issues discussed above.
Contact Ruban – http://br.linkedin.com/in/rubanselva – to see how the construction company’s model has been approved by Brazil’s prominent home lenders including the Caixa Econômica Federal and the Banco do Brasil as well as how the mortgage payments of Fez Tá Pronto housing units are cheaper than the rents being paid in centrally located Rio de Janeiro’s favelas.
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