Since January 2008, home prices in Sao Paulo have soared 181 percent and jumped 225 percent in Rio de Janeiro, according to the FIPE Zap index. That’s as much as twice the increase in rent prices, signaling that the housing market has become overheated, according to Shiller, a Yale University professor who helped create the S&P/Case-Shiller Index of U.S. home prices, which dropped 13.7 percent since 2007.

The warning comes as Brazil’s economy heads for its weakest two-year expansion in more than a decade and the central bank raises interest rates by the most in the world to contain inflation. Mortgage lenders such as Caixa Economica Federal will have to pass on rising borrowing costs to consumers already struggling with record debt by boosting the referential rate linked to mortgages, according to the Institute for Applied Economic Research. The average mortgage rate rose to 8 percent in July from a record low 7.74 percent in February.

“Why would prices double in five years?” Shiller said at an event in Campos do Jordao, Brazil, on Aug. 31. “What could account for that other than excitement? The prices go up every month. They always go up.”

No Bubble?

Mortgage lending in Brazil has surged eightfold in the six years ended June 30, to 345.7 billion reais ($147 billion), according to central bank data. Caixa, the state bank that accounts for about two-thirds of the mortgage market, said its real-estate lending grew 44 percent in the first half from a year ago, to 66 billion reais.

Teotonio Rezende, Caixa’s vice president of real-estate lending, said the bank’s portfolio of home equity loans will grow 60 percent this year to 7.5 billion reais.

Brazil’s housing price surge is not a bubble, Rezende said in an interview in Brasilia. It reflects pent-up demand after years of hyperinflation that plagued the economy in the 1980s and 1990s, he said.

“Between 1984 and 2002, real-estate values depreciated,” Rezende said. “There was economic stagnation, hyperinflation, wage loss, high unemployment. So what we’ve seen since then is a readjustment of prices recovering from that undoing.”

‘Angry Responses’

Rezende said mortgages as a percentage of Brazil’s gross domestic product rose to 6.5 percent in 2012 from 1.3 percent a decade ago, and could reach 12 percent by 2015.

That compares with a ratio about 20 percent in Chile, according to a July report by the International Monetary Fund. In 2009, mortgage debt was equal to more than 70 percent of the U.S. economy and more than 100 percent in Holland and Denmark, according to the IMF.

“There’s always a way to argue for any price increase,” Shiller said. “People like to think that this is a stable and steady increase. I was saying things about the U.S. just like this in 2005 and I got angry responses. I had people tell me you could be changing the psychology by saying these things. Some people think it’s like shouting fire in a crowded theater -- you shouldn’t do that because it could create a panic. I felt maybe I shouldn’t be doing it. But on the other side of it, I’m thinking, but you have to warn people at least.”

Rate Increases

The S&P/Case-Shiller index of U.S. property values, which Shiller co-created, rose 16.2 percent in 2004 and 15.5 percent in 2005, before leveling off in 2006 and crashing in 2007 and 2008. It has gained 19 percent since touching an 11-year low in March 2012.

Shiller suspects housing bubbles are brewing in emerging markets including China, Taiwan, India, Russia, Colombia, Canada and Hong Kong.

Brazil’s central bank voted unanimously last week to lift the target lending rate to 9 percent in its third straight half- point increase. Policy makers have raised the benchmark by 1.75 percentage points since April from a record low 7.25 percent, more than any other central bank tracked by Bloomberg.

While annual inflation slowed to 6.15 percent in the month through mid-August after it touched a 20-month high in 6.7 in June, the rate is still above the 4.5 percent midpoint of the central bank’s target. The economy will grow 2.2 percent this year after expanding 0.87 percent in 2012, according to estimates compiled by Bloomberg.

Growth Outlook

Standard & Poor’s put Brazil’s BBB sovereign credit rating on negative outlook in June, citing “slow” economic growth. Yields on the country’s benchmark local bonds due in 2023 have soared 2.91 percentage points, or 291 basis points, this year to 12.11 percent, according to data compiled by Bloomberg.

The indebtedness of Brazilians as a percentage of their accumulated income over the past 12 months rose to a record high 44.2 percent in April. Brazil’s unemployment rate was 5.6 percent in July, up from a record low 4.6 percent in December.

Gustavo Franco, a former central bank head who founded Rio Bravo Investimentos, said there’s no housing bubble in Brazil. Franco, who said the real-estate boom across emerging markets has reached the Sao Paulo neighborhood where his company located eight years ago, predicts real-estate investment funds will double in two years as middle-class Brazilians continue to realize their dreams of owning a home.

The Bovespa real estate investment fund index fell 9 percent in the second quarter, after posting a gain of 35 percent in 2012.

‘Defining Factor’

“When we moved in, there was nothing, and today it looks like Shanghai,” Franco, whose Rio Bravo manages 8.2 billion reais in real-estate funds, said at the event in Campos do Jordao. “Space is being occupied in emerging economies, and it’s almost a defining factor of what makes an economy an emerging one. Asset values can grow a lot in rapid processes of change and transformation. We clearly need to be paying attention in case there’s a bubble, but I don’t think there is one.”

The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries dropped seven basis points to 248 basis points at 7 a.m. in New York, according to JPMorgan Chase & Co.

Brazil’s five-year credit-default swaps, contracts protecting holders of the nation’s debt against non-payment, climbed one basis point to 209 basis points.

Real Slips

The real fell less than 0.1 percent to 2.3602 per dollar yesterday. Yields on interest-rate futures contracts due in January decreased two basis points to 9.28 percent.

Brazil’s personal loan default rate was unchanged in July at 7.2 percent, after reaching a three-year high of 8.2 percent in August 2012.

The referential rate touched a 14-month high of 0.07 percent Aug. 21.

“It is clear to me that huge increase in credit is creating a bubble in the Brazilian real-estate market,” economist Adolfo Sachsida at the Institute for Applied Economic Research said in an e-mail.