Opinion: Real Estate Sector in Trouble

05/13/2015 - 08h46

It appears as though the money for low-interest mortgages, regulated by the government, has run out. These are the funds that come from savings account deposits and the Severance Pay Indemnity Fund (FGTS, in its Portuguese acronym).

At the very least, the money in the Caixa Econômica Federal, which holds two thirds of mortgages, has run out or is about to.

It was obvious this moment would arrive. Mortgages with interest rates of at most 12% (from savings accounts) and a lot less than that (from the FGTS) depend on growth, mainly of the savings accounts but also of the FGTS to a lesser (but increasing) extent.

Since December 2014, the total savings deposits have been decreasing in real terms (adjusted for inflation, compared to the same month the previous year). Nonetheless, the number of mortgages continues to grow.

Since 2007, when more resources were available, the total government regulated real estate credit has increased twelvefold, while savings accounts deposits have increased times just 3.4.

Experts in the mortgage sector, real estate and construction have been warning since at least 2011 that the resources would dry up, highlighting the need to increase financial regulation of the sector, in order to enable the creation of new ways of raising the necessary funds.

In fact, the whole system of housing financing, compulsory savings (FGTS) and savings accounts needed to be rethought. Part of it is now fifty years old, invented at a more primitive time economically, when there was no financial market or even the Central Bank.

In short, mortgages are to become more expensive and harder to obtain. The problem is the need to control the short-term damage, the side effects of the crisis in construction, which is already fairly serious.

Translated by TOM GATEHOUSE

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