Quantitative easing and the Brazilian real estate bubble
By Jorge Eduardo Rubies*
Quantitative easing, the ultra-loose monetary policy thoroughly used by the Fed to stimulate the US economy, has had deep implications not only in its country of origin, but throughout the world. Its effects can be felt in other nations such as Brazil, where the “tsunami of dollars”, as it was dubbed by president Dilma Rousseff, has contributed to appreciate the Brazilian currency, the Real, and has also helped to inflate a gigantic bubble in the real estate sector.
Virtually all the major cities in Brazil are being affected by the bubble, but its intensity is by far more dramatic in São Paulo, capital of the state of the same name, and the largest city in the country and in the whole Southern Hemisphere.
With 11 million people (20 million in its metropolitan area), São Paulo is a kind of third world Gotham, plagued by poverty, crime, urban decay and widespread corruption. Traffic is chaotic: Time Magazine labelled São Paulo´s traffic jams the worst in the world. On the other hand, the city is the economic powerhouse of Brazil – the Paulistas are proud of their entrepeneurship and their work ethic. In the 20th century, São Paulo first received millions of immigrants from Southern Europe, then millions of migrants from the poorer areas of the country, making it Brazil’s land of promise.
The Paulista elite suffers from a “stray dog complex” vis-a-vis their counterparts in North America and Western Europe, and as a result always nurtured the ambition of being accepted as part of the developed world. In the eighties, this dream seemed near to come true. Sao Paulo had by then probably the best free public hospitals network, the best public, tuition-free, universities, the best highways in all Latin America and a small but reliable subway system. All of that was possible because of the city´s powerful industrial base, which produced virtually everything, from industrial machinery such as turbines for hydroelectric plants to the most trivial consumer goods. Automobiles were exported to the Middle East and shoes to the US, but the focus was on the domestic market.
But then came the economic crisis, the “lost decade” of Latin America, in fact 20 years of stagnation spanning the 80s and the 90s. Only in the beginning of the last decade the Brazilian economy started its recovery, which coincided with Luiz Inacio Lula da Silva´s terms as president. Brazil benefitted from the worldwide bonanza of that period, and the appetite for commodities not only in the developed nations, but also in China and other emerging markets. However, the stars of the economy were not industrial products anymore but, just like in Brazil´s colonial past, raw commodities, particularly soybean and iron ore.
Lula´s and Dilma´s economic policy aimed to curb inflation – a recurrent nightmare in Latin American countries – and at the same time, to prioritize consumer spending instead of much needed investment in the defficient infrastructure of the country, or to prevent the decline of industrial production. For this purpose, a variety of instruments was used, including lowering interest rates and lowering taxes for specific sectors. The flagship programme of the government is “Minha Casa, Minha Vida” (My House, my Life), which provides easy credit for the acquisition of new homes.
These were the first ingredients for the formation of the real estate bubble in Sao Paulo: economic growth after years of stagnation, and generous incentives by the federal government. The other ingredient is what I would call a lesson. A lesson that people are starting to learn in Greece, Ireland, Spain, Italy and throughout the world – even in the US: that “representative democracy” is neither democratic nor representative. We are thought at school that democracy is the government of the people, but we are finally beginning to realize that, in our model of democracy, citizens don´t count that much. It´s campaign donors who call the shots, and in the city of Sao Paulo, real estate speculators happen to be the main campaign donors for all the major parties.
So, apart from naming streets and bestowing honorary citizen titles to allies, the only laws approved by our City Council – a case study of incompetence and corruption – are the ones that benefit the real estate sector. It´s now evident for many that politicians will do anything to please those who pay their campaigns, even if it´s against the interests of their own constituents. That´s how half a dozen real estate barons took absolute control of a city with 11 million inhabitants.
In 2002, a new master plan for Sao Paulo was voted, and real estate speculators grabbed the opportuny to have approved everything they wanted. And they wanted to deregulate the market and more flexible urban laws. This means no height limits for new buildings, less restrictive zoning, less protection of the environment and of our architectural heritage, and if all of that wasn´t enough, they could also bypass the remaining legislation in many areas of the city by just paying na extra tax to the municipal government. Here is another lesson from our times, a time so rich in lessons: that when you deregulate the economy, the only law that stands is the law of the jungle.
That´s how the Sao Paulo real estate bubble was formed and thrived for a couple of years until the 2008 crisis came and everyone thought that the bubble was over for good. But then “Quantitative Easing” finally appears in this story. Suddenly, the Fed flooded the world with a deluge of dollars. Monetarist theory and economic practice say that printing money out of nowhere means hyperinflation, but that was not the case, for since the dollar is the world currency, all the nations will pay the price.
Time will say if Ben Bernanke is the greatest economic genius in history for saving the US economy from bankruptcy and the world economy from a new depression, or if he is just delaying the inevitable (I have my guess). For now, quantitative easing may not have helped to create new jobs in the US, but it did help to inflate quite a few speculative bubbles around the world, of which the Brazilian bubble, while not the biggest one, is probably the maddest.
Soon tens of billions of dollars poured into Brazil, but instead of much needed investment in infrastructure or industrial production, they went directly to the financial and real estate markets. And the Brazilian bubble not only resurrected out of the ashes but grew many times larger than its former incarnation.
Prices of new housing units were up 186% from 2009 to 2012; and 135,705 new housing units were developed in the same period. The native construction companies, until then family businesses, launched a series of multibillionaire IPOs to assure their share in the banquet. Multinational corporations were also attracted by the sudden bonanza; for instance, Brookfield Inc, owner of Zuccotti Park in Manhattan, site of the “Occupy Wall Street movement”, is notorious for being one of the most voracious players in the Sao Paulo real estate market – it is involved in a corruption scandal for allegedly having paid juicy kickbacks to city officials in exchange for the speedy approval of of an upscale shopping mall expansion in the district of Higienopolis.
The social and environmental impacts of the bubble on the city of Sao Paulo have been devastating. Hundreds of entire blocks in the traditional middle class and blue collar neighborhoods that form a belt around the city centre were bulldozed to make way for new towers. Thousands of local shops were closed, and tens of thousands of residents in these neighborhoods were expelled from their homes and forced to move to remote areas of the metropolitan region, which means that now they have to spend four to five hours a day commuting, instead of the usual two to three – generally in overcrowded and dirty buses, naturally owned by private corporations, and having to pay the highest fares of the emerging countries.
Since it´s a Brazilian tradition to grow luxuriant tropical gardens in the backyard of the homes, with the demolition of the old mansions, buildings and rowhouses, these green spaces and their full grown trees were also destroyed. In the old, middle-class neighborhood of Pinheiros for instance, 60% of all the vegetation was lost in just two years (2011-2013), and the case of Pinheiros is far from being an exception. Some of the obvious effects are the generation of heat islands, higher air pollution and the increase in floods, a constant problem in tropical regions.
The real estate bubble is concentrated on the construction of upper and upper middle class apartment buildings, with three to six car spaces per unit and built in a fake classical style, that in a city once renowned for the quality of its modern architecture. These new apartment buildings are equipped with a complete set of security paraphernalia which includes 20 feet high walls, barbed wire, electric fences, cameras, alarms, attack dogs, and security guards hired by Israeli owned companies. All of that in order to hermetically isolate their residents from the ‘hostile’ outside environment i.e. the Brazilian poor. It’s in these modern equivalents of medieval fortresses, which are no more than luxury ghettoes, that the Brazilian nouveaux riches intend to raise their kids – no wonder that criminality, violence and drug abuse among upper class youngsters is commonplace. Another consequence of this type of (anti)architecture is that the streets of the old neighborhoods, once pedestrian-friendly, vibrant and full of diversity and vitality, are now dead.
Another disastrous effect of the real estate bubble was in the industrial sector, already suffering from the appreciation of the Real. Land value has become so high that in the last ten years most of the factories moved to other cities or just closed down outright, since it is more profitable to sell the industrial plants for the construction of new apartment buildings than keeping production and trying to compete with much cheaper Chinese imports - and thus tens of thousands of blue collar jobs were lost. Remember that industry was the source of Sao Paulo’s power and wealth, and here we come upon another hard learned lesson of our times: that no major economy can thrive without a strong industrial base –that’s one of the main reasons behind the decline of Europe and North America and the spectacular rise of China. Deindustrialisation is the worst of the sins, and forget all that rubbish about the tertiary sector being the future of economy.
With industrial jobs in Brazil falling for six consecutive trimesters, and with a GDP growth of less than 1% in 2012, among many other dismal data, some are beginning to suspect that the years of prosperity may be gone and that the country may face some serious trouble in the near future. The effects of the sluggish economy in the housing market are already being felt: the price of homes fell by 20% in just one year; many companies are already in the red – the Brazilian branch of Brookfield, for instance, had a net loss of 47.7 million Reais (about 24 million dollars) in the first trimester, and its sales fell by 58% since the first trimester of 2012. The real estate sector is giving all the signs of being completely saturated. In fact, Brazilian families are already heavily indebted and many can´t afford paying the installments of their houses. The “My house, my life” program is now being called “My house, my debt for life”.
One of the most bizarre aspects of the Brazilian real estate bubble is that, even after the collapse of demand, demolition and construction in Sao Paulo are keeping the same frenetic pace; newspapers are full of ads of new developments (and full of comments of experts saying that there is no end in sight for the bubble, or that there is no bubble of all – no coincidence that the main campaign donors are also the main announcers in mass media). One explanation is that the world is so flooded with dollars that they keep flowing uncontrollably even into the most foolish investment options; the Brazilian government keeps pumping money into the construction sector not only to court potential campaign donors, but also out of desperation to keep the economy alive until the presidential elections next year; and some local investors are also lured into the trap, believing that somewhere in the future someone will be crazy enough to buy their assets for an even higher price that they had paid for. Anyway, although everybody is scared to death of a debacle of the dollar, including China with its trillions of dollars in reserves, sooner or later logic will prevail and it will lose much of its value. One can defy logic for sometime, but not forever.
We are living in a unique moment in history, where, after centuries of western domination, the balance of world power is rapidly shifting from the US and Europe to China. In this difficult period of transition, many doubts and uncertainties loom on the horizon, but some things now seem evident to more and more people, such as the fraud of representative democracy and the catastrophic effects of deindustrialisation. And another thing for sure is that among the main losers of this dramatic transformation are the inhabitants of the city of Sao Paulo – particularly the poorest ones.
One common saying about Sao Paulo is that it went into a decline without ever reaching its apogee, and these words have never been so true. The real estate bubble will leave a legacy of destruction of the environment, of entire neighborhoods wiped out, of skeletons of towers never to be completed all along the skyline and of the urban and social fabric of the city turned upside down. Through a weird combination of quantitative easing, neoliberalism and corruption, Sao Paulo is becoming the first metropolis devastated in times of peace by the hand of man.
*Jorge Eduardo Rubies is the president of Preserva Sao Paulo Association, a grassroots movement dedicated to the preservation of the environment and the architectural heritage of Sao Paulo, Brazil.