December 5, 2022

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Can inflation affect who has rental income?

Can inflation affect who has rental income?

In Brazil, we have a culture of treating real estate investing as the “holy grail of wealth growth” – which is why there are popular sayings like “those who buy land don’t make mistakes”. The main arguments commonly used address security of property; After all, there will always be, and self-assessed, with passive income from rent, which accompanies inflation (because contracts include a readjustment clause for IGP-M).

In this article I do not want to dwell on the issue of real estate estimation – although the data shows that it tends to be well below the popular imagination. Let’s talk about rental income, which for many can mean retirement – because at the end of each month, the money will fall into the account and will not lose its value. But will that really happen?

Law of supply and demand

a IGP-MIt is the indicator that occupies the highest share in wholesale inflation, rising by 17.8% in 2021, 23.1% in 2020, 7.3% in 2019 and 7.5% in 2018, accumulating more than 66% in these four years.

That should have driven up rent prices, right? Did the leases you know behave this way? Do you feel that prices have gone up that way? I do not have.

The reason for this is that there is a law of the market, a law of nature, that is stronger than the readjustment clause in contracts: the law of supply and demand. This law serves to explain the rise and fall of the dollar, but also wages and even the price of tomatoes at the fair. She is relentless! If there are more people willing to pay for something and fewer people willing to sell, the price goes up and vice versa.

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rent modification

The last few years have not been good for the economy in Brazil and many people’s income has gone down. In this way, the “buyer” party lost steam and prices were in fact supposed to fall.

From the point of view of landlords, which is better: not increasing the rent as per the contract or seeing the property empty, or having to rent it out again in times of crisis? Who ensures that the intended values ​​are obtained? And the What about the costs generated by the vacant property? All this made the rental price not if I acted like IGP-M.

During the pandemic, there has been much discussion about correction rates for leases. Thus, many began to change IGP-M (General Market Price Index) from the IPCA (Broad Consumer Price Index), which reflects retail-end inflation. It’s a start, but I think the progress could be even greater.

To get a realistic idea of ​​the values, we can refer to the index FipeZAP, which tracks real estate prices listed across the country. According to him, the alterations to residential real estate in São Paulo were much smaller than IGP-M Even from the IPCA: 3.9% in 2021, 2.5% in 2020, 4.9% in 2019 and 2.33% in 2018, with a cumulative figure of just over 14% in the period.

However, this index has an important issue. It captures ad prices and not deals that have already been closed. As we know, there is always negotiation, and the prices charged are seldom the ones posted.

How to track changes in real estate prices

The solution came through a new indicator from the Brazilian Institute of Economics at the FGV, the Residential Rent Variance Index (value added tax). This indicator measures the monthly development of residential rental prices in four Brazilian capitals, based on information on rental agreements obtained from property management companies. That is, the indicator takes prices that have already been collected and not those that have been announced.

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In that same period, value added tax The following behavior was, also in São Paulo: a decrease of 1.8% in 2021, an increase of 4.3% in 2020, a decrease of 3.8% in 2019, a decrease of 3.6% in 2018, and a buildup in the period of a decrease of 5%. This number is closer to my feeling than others and has the potential to be used in contracts, as a more consistent indicator than general inflation indicators.

In addition, this data also serves the purpose of analyzing potential investments in rental properties. It is an illusion to think that rental income is linked to inflation and that it will not lose purchasing power. Therefore, it is worth thinking more deeply about the risks and return expectations of this type of investment.