Brazil's housing market has yet to realize its full potential, despite a housing shortage estimated at 7.2 million in 2004. This is mainly due to a lack of long-term financing. However, improved macroeconomic fundamentals and an enhanced legal framework for the sector are changing the dynamics of real estate finance.

The number of homes built in 2006, though double that of a year earlier, represents less than a quarter of the estimated 600,000 new homes a year needed to meet the shortage of homes in Brazil over the next 20 years. This shortage takes into account homes occupied by more than one family, as well as substandard housing. In tandem with the existing housing shortage, Brazil's growing adult population is driving demand for new homes.

Developers, faced with the lack of financing, have come to rely on presales and land-share deals to finance construction. Working capital, which for homebuilders is indispensable, historically has been generated by presales. Developers have also adapted to the mortgage-scarce environment by providing vendor financing to homebuyers. In many cases, this was a profitable business for developers. But as a series of factors increases the availability of financing in Brazil, residential developers are focusing less on financing customers and more on their core competency of building homes.

A combination of downward-trending interest rates, an improving regulatory framework, government measures to increase financing and homebuilders' access to capital is changing the housing landscape in Brazil. Low interest rates (real rates below 10 percent) are not only a boon to the mortgage industry but also good news for the real estate industry as a whole: returns on real estate investments have become more attractive than those of government paper.