The government increased the price limit of houses people can buy using the unemployment insurance fund on Sept. 30 after public lending for homes increased more than four times as much as private banks in the two years through June, to 202 billion reais ($90 billion), according to central bank data.

Rousseff’s homebuilding program has propelled demand as she seeks to stimulate the economy before next year’s presidential election. Robert Shiller, six weeks before winning the Nobel Prize for economics, cautioned that such demand may be fueling a bubble as home prices grow twice as fast as rent. Mortgage debt as a percentage of disposable household income has climbed to a record 15 percent, almost double the level at the start of Rousseff’s term.

“That’s where there’s something happening in the credit market and, for a government very worried about growth, they’re not going to stop that party,” Tony Volpon, director of emerging-markets research at Nomura Holdings Inc., said by telephone from New York. “If there’s a bubble or not, that’s a future problem to deal with. I see no political incentive” to wind down mortgage lending.

Biggest Cities

Brazil’s real estate credit remains a relatively small part of gross domestic product and overall credit compared to other emerging markets, and growth has been rapid because of a small base, Tulio Maciel, the head of the central bank’s economic research department, told reporters in Brasilia Oct. 29.

Home prices in Brazil’s biggest cities, Sao Paulo and Rio de Janeiro, have surged 188 percent and 230 percent since January 2008 — about double the pace of rent, according to the FIPE Zap index of Brazilian housing prices published by the Economic Research Institute Foundation.

“A doubling of home prices in five years virtually never happened in the U.S.,” Shiller, a professor at Yale University in New Haven, Connecticut who forecast the U.S. housing crisis and helped create the S&P/Case-Shiller Index of home prices, said at an event in Campos do Jordao, Brazil, Aug. 31. “I actually don’t know it’s a bubble in Brazil, but I suspect it is and, maybe if I can just say that, it would help cool the fervor.”

Mortgage Loans

Bank lending for real estate rose 24.2 percent in the first nine months of the year, more than all other areas of the private sector, according to the central bank.

Mortgage loans have nearly tripled from 2.3 of GDP to 6.8 percent of GDP after the global financial crisis, with state- owned Caixa Economica Federal accounting for 70 percent of the total, according to the International Monetary Fund.

“A correction in property prices, although not systemic, could worsen asset quality in public banks due to the rapid expansion of mortgage loans in recent years,” the Washington- based lender said in a report Oct. 22.

Caixa’s real-estate lending in the first nine months of this year hit 100 billion reais, with one-third of resources coming from the unemployment fund known as FGTS, according to an Oct. 3 statement by the bank.

Brazil’s National Monetary Council, made up of central bank and government officials, on Sept. 30 increased the maximum home value workers can purchase using the FGTS by 50 percent to 750,000 reais for states accounting for 42 percent of the country’s population. The limit for other states increased 30 percent to 650,000 reais.

Cancellation

Increased cancellation of mortgage contracts is a sign companies must tighten credit standards for middle and lower- income buyers, according to Cristiane Spercel, an analyst at Moody’s Investor Service.

Brazilian homebuilders now have the highest leverage of peers in the Americas as consumers with less disposable income increasingly have their home contracts canceled, Moody’s estimates.

The cancellations prompted Moody’s to push back its forecast for when rated homebuilders in Brazil will become free cash flow positive to a range of 2014 to 2015 from an original estimate of 2012.

“Cancellations are a red flag and it shows that there are some limitations in the growth model,” Spercel said by phone. “But in our opinion the demand for home acquisition remains robust.”

Builders’ Leverage

Mortgage lending remains under control, Marcio Holland, the Finance Ministry’s economic policy secretary, said the day of the IMF report’s publication.

“We started to increase mortgage lending in comparison to lending for durable goods,” Holland told reporters in Washington. “Households are borrowing in the banking system to get a house. It’s much better collateral than durable goods.”

The median ratio of gross debt to book capitalization for Brazil’s rated homebuilders was 60.7 percent in the second quarter compared to 54.7 percent in the U.S. and 48.1 percent in Mexico, where at least three builders defaulted on debt this year, according to a Moody’s report published Oct. 7.

Brazilian homebuilders PDG Realty, Brookfield Incorporacoes and Gafisa SA have local bonds and are under pressure to generate cash to reduce debt, according to the report.

“The current trend for housing prices is clearly unsustainable,” Luciano Rostagno, chief strategist at Banco Mizuho do Brasil SA, said by phone. “Households already are highly indebted and the pace of credit growth, especially for the housing market, is very high. It would be prudent to slow down the pace of loans to the housing market.”