First, read it. It's an education in the finances of housing investment.
Ricardo closes his post with this conclusion:
Right on, Ricardo. Investing in real estate for profit is one thing. For this, it's only the accounts that matter. How much we can gain from an investment in housing versus how much in other instruments.Não devemos comprar imóveis então? Em absoluto, sim. Mas devemos fazer contas. Nos preços atuais não faz sentido matematicamente. As taxas de juros estão muito altas e os preços dos imóveis não sobem infinitamente mais de 20% por todos os anos. Logicamente, não é só matemática que nos impele a comprar um imóvel: necessidade, gosto, status, família que cresce, espaço gourmet… Opa? espaço gourmet?
Our personal real estate is another thing, as I have argued in this blog previously. As I said as long ago as 1987, housing is a "special" good that has value for us well beyond the financial return we can gain. Which goes to show that not all goods are fungible — not all goods have the same opportunity costs. I'm willing to trade some value that I could earn from a bond for the view that I have from our apartment every morning or the convenience of the apartment to my principal place of work. As for the espaço gourmet . . . if it has a churrasqueira, I'm for it!
The danger is when markets price themselves out of the range of the people who need to live in the locale, such as been happening in São Paulo (and in Israel, where I am writing this). Families then have difficulties finding residences that fit within their budgets. They end up paying a much higher percentage of their monthly income to support mortgage (loan)/condominium/tax payments than they really can afford. Banks compound the problem when they lend money based on these elevated percentage of income levels as they know historically that the probability of default rises drastically.
Corrections, or price declines, themselves have problems. When the family paying for a mortgage sees that the value of the residence can no longer equal what they need to earn to justify the investment in financial terms, many families will not show patience and wait out the decline. They will sell out to "cut their loss" at an even lower price, thereby further depressing prices. This was one important aspect of the US housing price decline in 2008 - 2010. That can become a spiral with new families now acting on the same perception.
So, Ricardo's analysis of the finances of a house purchase is very on point for the current market in São Paulo. So is his observation that one factor that will dampen the declines and keep pressure off the banks to default mortgages of borrowers who are having trouble with their payments is that most of the mortgages they have remain on their books. They have not been securitized — sold off to investment pools.