News shocks, government subsidies and housing prices in Brazil

Abstract

Purpose In recent years, housing prices in Brazil have shown a surprising growth. An important issue is trying to understand what elements can explain this behavior. This study aims to investigate the hypothesis that a generalized optimism associated with government policies directed to the housing sector may be behind the behavior of real estate prices. This study develops a dynamic stochastic general equilibrium (DSGE) model to investigate these issues. The results showed that subsidies combined with the easing of credit conditions were able to positively influence real estate prices. Moreover, unanticipated shocks had a greater impact on housing prices than anticipated shocks. Design/methodology/approach The DSGE model was developed to analyze the relationship between economic agents’ expectations about future economic developments, also known in the literature as “news shocks,” expansionary fiscal policy and housing prices in Brazil. The economy is composed of families, entrepreneurs, final goods firms, a financial sector and a fiscal authority. Families are divided into two groups: patients or savers and impatient or debtors. They differ in terms of their intertemporal discount factors. Both provide labor for firms producing non-durable goods. Impatient families are restricted in the amount of borrowing they can take. The production side of economy model is given by the consumer goods production sector. The financial sector is composed of a representative bank that pays the deposits made by patient families and channels resources for the granting of housing loans with the accumulation of assets subject to regulatory restrictions. Findings The results show that both price subsidies and subsidized interest rates exerted a positive influence on housing prices in Brazil. In response to a housing demand shock, housing prices display a greater increase the greater are the subsidies to low income families. The authors show that anticipated shocks have a larger impact on housing prices than unexpected shocks. Therefore, the results support the idea that the wave of good news, optimistic behavior and government policies aimed at the housing sector were behind the behavior of housing prices in Brazil. Originality/value There are some studies applied to the Brazilian economy that mention some of these stimuli. In this study, the authors focused on studies proposed by Mendonça et al. (2011), Mendonça (2013), Silva et al. (2014) and Besarria et al. (2016). In general, the authors show that there is a negative relationship between monetary policy instruments and real estate prices. This paper differs from these authors by considering the effects of government subsidies, subsidized interest rates and anticipated shocks from a DSGE model, thus explicitly addressing their effects on housing prices in Brazil.