High interest rates and inflation increase the risk of real estate contract cancellations.
Although at their lowest level in almost ten years, contract cancellations continue to pose a risk for those buying off-plan properties, despite the good performance of the real estate market.
Agency Brazil - The strong performance of the real estate market in 2022 hides a risk. Although at their lowest level in almost ten years, contract cancellations continue to pose a danger for those buying off-plan properties. High interest rates and inflation can result in headaches during times of economic change.
The purchase of off-plan properties represents a separate category in the real estate market. Through this method, the buyer finances the construction of the property, paying intermediary fees that, when added together, equal the down payment. After the unit is completed, the buyer takes out a loan from the bank to pay the rest.
This procedure entails two inherent risks. Intermediaries are adjusted by the National Civil Construction Index (INCC), which tends to be more volatile than other inflation indexes. “Developers choose the INCC because those who buy off-plan are, in fact, financing the construction of their own property,” explains Marcelo Tapai, a real estate law specialist and partner at Tapai Advogados.
Even with the slowdown, the INCC remains above the official inflation rate according to the Broad National Consumer Price Index (IPCA). In the 12 months ending in August, the INCC accumulated 11,17%, compared to 8,73% for the IPCA. “Those who buy a property off-plan need to have a financial reserve because the intermediate reserve will rise more than the inflation that affects income, especially in times of growth in the real estate market, such as the current one,” says Tapai.
Selic
After construction is complete, borrowers need to be aware of another risk. From March of last year to September of this year, the Central Bank (BC) raised the Selic rate (the basic interest rate of the economy) from 2% to 13,75% per year. Those who had planned to take out a mortgage with low interest rates are finding it difficult to fit the payments into their budget with the higher interest rates.
“If a person hasn’t done financial planning, they may not be able to afford the financing and have to return the property,” warns Tapai. He emphasizes that, although the Selic rate has stopped rising, At Wednesday's meeting (22), the Central Bank left open the possibility of raising the rate again if inflation accelerates once more.
For now, consumers are feeling less of the impact of the increase in the Selic rate because banks are taking a long time to pass on the increase in the Selic rate to housing loans. According to data from the Brazilian Association of Real Estate Developers (Abrainc), average interest rates on real estate loans have jumped from 2,5% to 9,8% per year since March last year.
“Current financing is mostly linked to funds invested in savings accounts. Since the investor’s remuneration is fixed, this prevents interest rates from rising as much as the Selic or the IPCA. Therefore, I believe that the situation should continue to be positive for the real estate sector in the coming years,” stated Abrainc president Luiz França last Wednesday, when presenting the real estate market statistics for the first half of the year.
lag
According to Abrainc, the real estate sector has not yet felt the effects of the rise in interest rates. In the first half of the year, the number of property launches increased by 3% compared to the same period last year. Sales grew by 18% and the volume of real estate financing increased by 5%.
Regarding terminations, the rate of canceled contracts fell from 12% in the first six months of 2021 to 11% in the first half of this year, reaching the lowest level since the beginning of the historical series, in 2014. “The drop is very relevant for the industry and shows us that we can put our foot on the accelerator, trusting in legal certainty”, highlighted França, when presenting the Abrainc data.
Tapai, a lawyer specializing in property return processes, disagrees and says that the risks remain. “Economic uncertainties continue and many consumers who bought property in the current wave may face difficulties in the future. Especially those who bought off-plan,” he warns.
Travel tips
The termination process, Tapai explains, always results in losses for the buyer. Developers usually return only 50% of the amount paid. “Since the intermediaries should, in theory, be equivalent to the down payment for the property, the consumer should get back 70% to 75% of the value,” he says. To receive these percentages, the consumer needs to go to court.
For the lawyer, the best solution for a consumer who bought a property off-plan and was unable to pay the installments is to transfer the contract at a discount to a friend or other interested party before canceling the contract. “Even with the discount, the buyer usually receives 70% of the amount invested in the event of a contract transfer,” he explains.
The lawyer's main tip, however, is to avoid buying off-plan property and save as much as possible to pay a deposit on a ready-made unit. "Those who are patient and wait can buy a ready-made unit that has been returned by another consumer. In their rush to get rid of losses, construction companies often sell at discounts," he advises.
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