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Brazil, host nation of world cup 2014, lost to Germany by 1-7. This seems very big defeat in term of goal difference. What is the worst defeat of a host nation in world cup history in terms of goal difference?

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Yes, this was the worst defeat of a host nation in the history of the world cup! Other notable defeats are:

Link: World Cup 2014: Most Lopsided Football Matches, Worst Host Defeat, Biggest Soccer Blowouts in History

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Looking at statistics of all world cup matches, this is the worst defeat of a host nation in world cup history in terms of "goal difference". This is also the worst defeat by a host nation in terms of "goals against" jointly with Switzerland (1954) 5-7 against Austria.

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