Booming Brazilian mortgage loan market poised for another record year

The mortgage loan market in Brazil is on track to see yet another record year in 2021, according to estimates from real estate credit association ABECIP, and could continue growing in the coming years to represent a significantly larger portion of the country's GDP.

Lower loan rates and property prices, as well as renewed demand for bigger houses because of the pandemic, are driving a surge in mortgages, Cristiane Portella, president of ABECIP, said in an interview. The association expects new disbursements to hit 170 billion Brazilian reais this year, up 34% from 2020, when Brazil recorded its highest real estate financing volume since ABECIP began tracking the data in 1994.

Despite ongoing mobility restrictions, real estate credit expanded 57% last year to cross the 120 billion reais mark and surpass levels seen during São Paulo's latest real estate boom in 2014.

"It was a complete milestone even in spite of the pandemic," Portella added. The momentum from 2020 carried into the current year, with roughly 43 billion reais disbursed in the first three months of 2021 alone.

Real estate financing was a major driver of loan expansion at top Brazilian banks last year, offsetting relatively sluggish performance in other segments such as personal and credit card loans. Real estate loans grew 38.1% for Banco Bradesco SA and 32.4% for Itaú Unibanco Holding SA, representing the fastest growing credit segment for both banks in 2020.

The mortgage business provided banks a way to lend with limited risk during the pandemic, and at the same time helped them drive customer retention.

"Mortgages are a product for relationships, not spread," said Antonio Marques Barbosa, executive superintendent in charge of mortgages at Bradesco. "Even though the margin is very low, it brings a long-term relationship with the customer and the opportunities to cross-sell are huge."

However, despite those benefits, mortgage loans still have a limited presence in the credit books of top Brazilian banks. At the close of 2020, The segment accounted for less than 12% of the total portfolios at Bradesco, Itaú and Banco Santander (Brasil) SA, S&P Global Market Intelligence data shows.

According to Barbosa, mortgage credit represents 9% of Brazil's GDP, compared to around 24% of GDP in Chile. But with the initiation of a positive cycle in the mortgage market, Brazil "could be somewhere around 15% to 16% of GDP" in five years, he said.

The realization of that potential will depend to some degree on Brazil's rate environment. Although the country's benchmark Selic interest rate fell to an all-time low amid the pandemic last year, Banco Central do Brasil has started tightening its policy and raised the rate in March for the first time in six years. The Selic could end 2021 at 5.75%, up from 3.50% currently, according to central bank surveys of economists.

The average rate on real estate credit in Brazil was 6.9% as of March 2021, down from 9.8% in the same month of 2017, but with the benchmark rate on the rise, banking rates and mortgage pricing are expected to tick upwards.

According to Bradesco's Barbosa, each percentage point increase in the average mortgage rate makes that financing unaffordable for about 2 million households.

The sustainability of real estate financing is directly related to the preservation of low interest rates, ABECIP's Portella said. "If we are talking about an adjustment [in the average real estate credit rate] toward 7.0% or 7.5%, it will still remain a very attractive rate," she added.

Local banks in recent years have focused on so-called floating mortgages, in which the loan rate is based on variables such as inflation. But upward inflationary pressure — annual inflation in the country rose above 6% in March for the first time in more than four years — is undermining the attractiveness of these loans for Brazilians, with analysts foreseeing a gradual shift toward fixed rates.

As of June 4, US$1 was equivalent to 5.08 Brazilian reais.