Understand how the new FGV index for rent is calculated

The Brazilian Institute of Economics (Ibre), from the FGV, launched this Tuesday (11) the Residential Rent Variation Index (IVAR) as another option on price dynamics in the real estate market.

Paulo Picchetti, coordinator of the IPC Brazil at Ibre/FGV, explains that the IVAR was already calculated by Ibre, but with a different methodology, being a sub-index in the calculation of the IPC-S and the IGP-M. Previously, rent prices were considered in real estate rental advertisements, monitoring their variations.

“This is clearly not an ideal method because we know that the asking price is not necessarily the value of the actual transaction, the value is what is in the contract, after negotiations”, he says.

Currently, the IGP-M is the most common index in rental contracts, however, in 2021 it accumulated a high of 17.78% and, in 2020, of 23.14%, which made many people seek other indices for the readjustment of the rent. contract.

How does it work?

Once this discrepancy was considered, the institute began to study the creation of an index that would measure the real value of rents real estate, that is, those defined in contracts, and their variations.

After signing agreements with real estate companies and administrators, the responsible team had access to the monthly rental contracts and the rent adjustments that month, either due to the rule of reviewing the value every 12 months or through renegotiations.

The IVAR takes into account the variations in the prices of these two elements, giving, according to Picchetti, “a more refined dynamics. “We changed the source of information”. While the new IVAR already follows this methodology, the change enters the IPC-S only as of January.

Picchetti says that the change in methodology has already generated divergences. In the accumulated of 2021, the old methodology IVAR registered a high of 4.45%. With the new methodology, the accumulated for the year was a drop of 0.61%.

“We are experiencing a particular moment, a pandemic, a recession, and the market is suffering from the loss of purchasing power of families. The reality of the last two years has been in this direction, of negotiating prices downwards”, he says.

For Picchetti, the data confirms that, in general, the rental prices announced and practiced are different, but not necessarily always lower. “It can be reversed in the future, if an ad generates many interested parties, the owner can negotiate upwards, for example”.

The index has a sample of contracts from four capitals: São Paulo, Rio de Janeiro, Belo Horizonte and Porto Alegre. Brasília, Salvador and Recife, which were considered in the IPC-S, are not included in the calculation.

“The choice was based on the representativeness and availability of information, ideally we would like it to reflect more capitals and cities, but it is difficult to obtain information, it takes us a long time to have only these 4 cities”, says the economist.

According to him, the expectation is that, over time, new real estate agencies and entities will appear willing to share the information, composing more robust samples to include more cities in the survey.

“Each city has its specificities. The impact of the pandemic itself had regional differences, including for the real estate market. At the same time, if we look at the evolution graph, the trend is very similar, the economic environment is common to all, so the tendency is both to drop rental prices and to negotiate ahead of the announced”, he says.

Use us contracts

Also calculated by the FGV, the General Market Price Index (IGP-M) has been the main benchmark in the adjustment of residential rent values ​​for decades. In 2020 and 2021, however, it had an accelerated and intense rise, pulling rents along with it amid a scenario of economic crisis.

Picchetti says that the IVAR is “from a conceptual point of view, more appropriate” than the IGP-M to be used in contracts. “The IGP-M has been used for decades in contract readjustments, but it was not created for that, it was created to measure wholesale prices, construction material, consumer prices”.

“The rent has been readjusted upwards in recent years because the price of soy, iron ore, gasoline has risen, which makes no sense from an economic point of view”, he says.

In this sense, by exclusively measuring the dynamics of the evolution of supply, demand and price in the residential rental market, the IVAR manages to be a better benchmark. The adoption, however, depends on each property owner and lessee, in the contract negotiation and adjustment process.

“In the last two years, we have seen this downward trend in rents, not an increase, but the IGP-M has accumulated an increase of almost 17%, the IPCA, another alternative that emerged for the readjustments, closed at 10%”, he says.

The adoption of the IGP-M in rents took place in the 1980s. “We were experiencing a process of hyperinflation. Basically you have two assets in the economy that are safe havens against the loss of purchasing power: real estate and foreign currency”, says Picchetti.

Brazilian legislation prohibits entering into rental contracts following the exchange rate. dollar, but homeowners wanted to protect their purchasing power. The alternative found was the IGP-M.

“It was chosen because it still has a strong correlation with the dollar, and it was inertia in the absence of a better quality alternative. But the last two years have shown this inadequacy of this index for the readjustment of contracts, with them rising at the height of the pandemic”, he says.

“The main reason for creating the IVAR is to offer better quality information to the public. We have no control over the use they will make, but experience will show whether it will be adhered to or not”.