Low interest rates, attractive property prices, and a 43 billion reais credit line from state-run lender Caixa Econômica Federal have kept Brazil's housing credit market afloat during the pandemic, although industry experts expect disbursements in 2020 to decline.

The Brazilian Association of Real Estate Credit and Savings Entities, or ABECIP, which, prior to the pandemic, had forecast 32% growth for total real estate credit portfolios for the year, has drastically reviewed that forecast to a decline of 7% from 2019 levels.

But the credit sector, and mortgages in particular, have so far remained resilient in Latin America's biggest economy.

Despite the country's 1.5% GDP contraction in the first quarter and increased unemployment, new mortgage loans shot up by an impressive 24% in March year over year. The spread of coronavirus and the deepening health crisis tempered that growth to 5.3% in April.

Furthermore, the total housing credit portfolio in Brazil rose by 7% in March and 7.6% in April year over year. Brazil's total active mortgage portfolio also expanded in April to 653.81 billion reais, up 0.9% from March, Banco Central do Brasil data shows.

As average mortgage loan rates dropped to 7.2% in April, close to all-time lows, mortgage portfolio growth in Brazil outpaced regional peers such as Mexico and Colombia. In Peru, one of the region's most stable economies, the sector began to contract after the first quarter.

For ABECIP's president and the former director of real estate credit at Itaú Unibanco Holding SA, Cristiane Magalhães Teixeira Portella, the growth observed in April "is a really good sign, even though it is inferior to our initial forecast."

"This growth is explained by a very attractive interest rate, for Brazilian standards, and by attractive real estate prices that still have not recovered to pre-2015-crisis levels," she told S&P Global Market Intelligence.

"The purchase of property is a long-term decision, and buyers who already had plans in place and do not foresee themselves losing their jobs due to the pandemic are following on with their plans," said Magalhães Teixeira Portella, who stepped down from executive functions at Itaú in April but is still a director at the bank.

"This is especially true for consumers buying their first home, where they exchange the rent payments for the mortgage payments," she added.

Although ABECIP expects the real estate credit market to decline as a whole, Banco Bradesco SA's Executive Superintendent of Real Estate Credit Antonio Barbosa sees the residential mortgage market as more resilient.

Barbosa believes the growth in the first four months of 2020 has been too strong for the banking system to see an annual decline in new mortgages this year, and highlighted the bank's 30% growth in new mortgages in the first quarter.

"After the initial impact of the pandemic, people have recovered their confidence, especially regarding the possibility of losing their jobs in the near future," he said. Bradesco offers a 7.5% mortgage portfolio interest rate on average, and its demand for residential credit products in May has been similar to April's.

For Elyseu Mardegan, a former real estate director at Paraná Banco SA who recently set up a fintech focused on the sector, "the quarantine has not had the impact we would have imagined," and one of the main explanations is that "the decision to purchase a property is a long term commitment, and life has to go on."

Caixa to the rescue

Caixa's 43 billion reais credit line for the real estate sector — aimed not only at sustaining individuals' access to housing but also at supporting private sector companies' staffing and investments — has been pivotal in keeping the mortgage in the black since the start of the pandemic, according to S&P Global Ratings analyst Celio Neto.

In addition to below-market interest rates, Caixa — which holds almost a 70% share of the housing credit market and last year pioneered fixed-rate mortgages in Brazil — has allowed borrowers to opt for a 180-day grace period for new real estate financing contracts, before having to make their first repayment.

"If we do not consider Caixa and its financing, the market would have suffered," Neto said, pointing to the state-run's bank funding advantage relative to private sector lenders, as the former has access not only to savings account deposits, but also to the Federal Severance Pay Fund, or FGTS, which is financed each month by 8% of Brazilian workers' paychecks. "It didn't keep the market warm, but it kept it alive," he added.

"Many people are not assuming such a long-term commitment because they don't know if they will have a job next month," Neto said, emphasizing that Caixa has sought to counteract this with a stimulus for origination. The analyst expects to see slightly better numbers for May and June, but far below the growth levels seen in the recent past.

According to Mardegan, lenders other than Caixa are "much more cautious regarding all credit products because of income reduction, loss of jobs, and companies closing," and also due to the fact that "credit bureaus that usually receive negative information after 10 days, are now allowed to flag a customer only 45 days after a payment was missed."

Economist Fernando Ribeiro Leite, for his part, agreed that low prices, interest rates and Caixa's credit line have been crucial to the sector since the start of the health crisis, but noted that the risk on such lending for banks has not risen greatly, as they have the property as guarantee for the loan. "It's not as liquid as money, but it is still an asset," he added.

As of Jun. 25, US$1 was equivalent to 5.35 Brazilian reais.