Feb. 24 (Bloomberg) -- Sitting in his freshly painted living room as his son plays nearby, Joao Pedro de Souza recounts a peak moment in his life. Last year his family left a shanty in the vast slums of Sao Paulo and moved into this new two-bedroom apartment, with a full kitchen and bathroom.
He credits one person for his good fortune: Brazil’s President Dilma Rousseff.
“If it wasn’t for the government financing, I would never be able to buy an apartment,” said Souza, 34, who is unable to hold back a smile as he relaxes on a new black couch financed with subsidized credit.
Rousseff’s My House, My Life program has helped cement her frontrunner status prior to the October election. The president, who’s struggled with massive street protests, high inflation and the exodus of investors from Brazil, touts the success of her housing initiative everywhere she can -- in speeches, TV appearances, radio addresses, blog posts, Twitter posts and ribbon-cutting events.
“This program is the government’s direct line to its base of support,” said Joao Augusto de Castro Neves, a Latin America analyst at Eurasia Group in Washington. “They’re giving people houses, things to put in their houses and jobs because someone has to build the houses.”
The loans and subsidies from state banks that fuel the initiative also are driving up Brazil’s deficit and the debt needed to finance it. The budget gap will expand to 3.9 percent of gross domestic product this year, the widest since 2009, according to a survey of forecasters by Bloomberg in January. That’s double the deficits of Turkey, Russia and Indonesia and above Brazil’s average of 2.9 percent over the past decade.
The International Monetary Fund said Brazil’s gross debt will reach a decade-high of 69 percent of GDP this year. Further debt growth could lead to a downgrade for Brazil from its Baa2 rating, which is two levels above investment grade, Moody’s Investors Service analyst Mauro Leos said in January.
The yield on Brazil’s bonds due in 2041 rose 14 basis points, or 0.14 percentage points, since they began trading in October 2009, to 5.821 percent.
“The fiscal situation is very delicate already,” said Vinicius Botelho, an economist at Getulio Vargas Foundation in Rio de Janeiro and a former consultant to the World Bank on fiscal matters. “The deficit must be cut to stabilize gross debt, and that must come from a reduction in state bank lending.”
On Feb. 20, the Finance Ministry said it will pare 44 billion reais ($19 billion) from the budget in 2014. The cuts, which didn’t affect My House, My Life, represent 28 percent of the previous year’s deficit.
Rousseff, 66, created and helped roll out My House, My Life in 2009 while serving as chief of staff under former President Luiz Inacio Lula da Silva. Run by the Ministry of Cities, it gives low-income Brazilians a shot at owning a home by reducing mortgage payments or by cutting interest rates, sometimes in half.
The government had initially planned to spend 34 billion reais to place Brazilians in one million new homes built by private developers. After winning the 2010 election, Rousseff more than tripled the program, approving 126 billion reais the following year to create as many as 2.6 million more dwellings.
Last year, as the pace of economic growth was slowing to 1 percent, the president announced another 19 billion reais in subsidized lending for new home owners to buy appliances, TVs and tablets.
“This isn’t a matter of alms, it’s not a matter of donations, nor is it a gift,” the president, a member of the Workers’ Party, said in a November speech at a convention center in Brasilia, raising her voice above cheers of supporters. “It’s an obligation of the state and it’s a right of each citizen.”
The program has become a battlefront in the campaign for president. Senator Aecio Neves, one of the president’s main challengers, said in a column that housing is the ruling party’s way of “putting the state machinery and public money at the service of their project to stay in power.”
Neves, the leader of the Social Democratic Party, said most of the associations overseeing housing construction are run by members of the Workers’ Party. He said some of the associations select applicants with a point-based system that accounts for their participation in Workers’ Party-affiliated events.
“I fear, as a Brazilian, four more years of a government that isn’t transparent, that isn’t efficient and thinks it can fool everyone all the time,” Neves said on his blog. He declined to comment for this story.
Ines Magalhaes, the Ministry of Cities housing secretary, said that state lender Caixa Economica Federal analyzes the viability of participants using technical criteria only.
“The same way we don’t ask the homebuilders if they are affiliated to any party, we don’t ask the families,” Magalhaes said from Brasilia.
Rousseff’s project is also beset by corruption allegations. Federal prosecutors have opened 224 investigations related to the program, including fraud and corruption probes, according to the attorney general’s office in Brasilia. Authorities are looking into whether participants lied about their income to qualify for the program and if former Ministry of Cities officials received bribes from prospective home buyers.
Magalhaes said that all of the government’s social programs are subject to controls and audits.
“We forward all complaints to the internal control authorities,” he said.
Souza moved from his home town in the northeastern state of Pernambuco to Sao Paulo because he said he had a better chance of qualifying for the program in South America’s biggest city. He built a brick and mortar room on the roof of his sister’s small home in one of the favelas that ring Sao Paulo. The favelas, neighborhoods mostly composed of substandard housing, began spreading across the country more than a century ago after the liberation of the world’s largest slave population triggered mass migration to industrial hubs.
“Even though my sister and my brother-in-law said that it was our house just the way it was theirs, we didn’t feel comfortable,” Souza said. “We didn’t have privacy. I wouldn’t rest until I could have my own house.”
The lack of affordable housing in Brazil is most acute in Sao Paulo, with a population of 19.6 million. In the country’s eight biggest cities, more than 50 percent of families can’t afford a home, led by Sao Paulo at 62 percent, according to a 2012 Inter-American Development Bank report.
As housing prices skyrocket due to a shortage of homes and an escalation of private and state bank mortgage lending, buying property in Brazil is only getting harder. Home prices in Sao Paulo have jumped 197 percent and 243 percent in Rio de Janeiro since January 2008, according to the Fipe Zap index published by the Economic Research Institute Foundation. Yale University professor and Nobel laureate Robert Shiller said in August that a housing bubble had formed in Brazil’s biggest cities.
In five states, squatters, many of whom are too poor to participate in the housing program, have invaded new homes before the owners have moved in. This month, squatters in Sao Paulo set fire to barricades and hurled rocks to prevent police from evicting them.
Rousseff’s housing initiative, the largest in Brazil’s history, reduces mortgage payments to 5 percent of a family’s income for those making less than 1,600 reais a month. And it provides mortgages with rates as low as almost half of what the market offers for families earning less than 5,000 reais a month.
Borrowers have a low default rate of about 2 percent. Almost 20 percent of the monthly payments of the program’s poorest recipients, which account for 43 percent of the houses approved, are behind schedule, according to a statement from Caixa. The bank said it has seized 2,186 properties in the program for breach of contract.
Souza, who earns about 1,100 reais a month as the doorman of the apartment complex where he lives, qualified for a subsidized mortgage in 2009 to purchase a 43-square-meter (463-square-foot) apartment worth 80,000 reais. He wasn’t required to make a down payment. After 10 years, he will have paid off his mortgage and own the apartment. The government will have covered about 90 percent of the total costs.
Souza’s new apartment is a vast upgrade from his home in the favela. His unit, located in a complex of 15 brick buildings in a modest neighborhood, has a stove, a refrigerator, a flat screen TV and a bathroom with a shower. The only thing missing is outdoor space for children and parking.
“The kids need a place to play,” said Jane Cleide da Silva Souza, 28, who with Joao is raising Pedro, 5, and Vitoria, an infant.
Brazil’s Treasury has lent more than 440 billion reais to state banks since 2008, helping fund their balance sheets. Caixa gave a total 49 billion reais in housing subsidies and mortgages in 2013, more than triple the amount released in 2009, according to the bank, which responded to a Bloomberg News freedom of information request.
Moody’s and Standard & Poor’s cited the boom in state banks’ loans, deteriorating finances and a lack of fiscal transparency when cutting their outlooks on Brazil’s credit grade in October and June, respectively.
Concern over Brazil deepened after Morgan Stanley warned in August that the real is among the “fragile five” emerging-market currencies most vulnerable to the Federal Reserve’s tapering of monetary stimulus. The real tumbled 18 percent in the past year, the most among major currencies after South Africa’s rand.
The BM&FBovespa Real Estate Index fell 28 percent in the past 12 months and is down 7.1 percent this year.
Rousseff told investors in Davos on Jan. 24 that she has been working to improve Brazil’s fiscal situation. She said she plans to bring government indebtedness to one of the lowest levels in the world as private firms increase lending to allow state-owned banks to reduce credit.
The president probably won’t pare back the housing program in a year in which she is campaigning for re-election, Eurasia’s Neves said. Brazil’s lack of affordable housing also makes it difficult to reduce spending on it, said Teotonio Rezende, Caixa’s executive director of housing.
Caixa, which has distributed program subsidies and mortgages worth 176 billion reais since 2009, has said it plans to grow its credit portfolio by as much as 28 percent this year. That’s down from 37 percent in 2013.
“They might make adjustments or change the name of the program, but I don’t believe there’s any room for not taking strong actions to build housing,” Rezende said from Brasilia. “Without the program, the housing deficit would be growing. In all of Brazil’s history, there’s never been such an effort on housing.”
Less than eight months before the election, the president leads Senator Neves in the latest poll by Datafolha. She would win 47 percent of ballots in the first round compared with 17 percent for Neves in one potential election scenario, according to the Feb. 19-20 survey of 2,614 people.
Rousseff’s support comes almost exclusively from low-income Brazilians. Her approval rating is 52 percent among those earning less than 1,356 reais a month, and zero among those who make more than 33,900 reais, according to a November Datafolha poll.
Souza, who said he has been making mortgage payments on time, is furnishing and decorating his home. He’s planning to buy a new refrigerator and cabinets for the kitchen after he finishes paying for the floor tiles.
Pedro and Jane said that they voted for Rousseff in the past election and will do so again.
“It seems just fair to me that we vote for the people that are working to improve our lives,” the doorman said.