Testing for bubbles in housing markets: some evidence for Brazil

• Published in: International journal of housing markets and analysis Vol. 11; no. 5; pp. 754 - 770
• Main Authors: Besarria, Cássio da Nóbrega, Paes, Nelson Leitão, Silva, Marcelo Eduardo Alves
• Format: Journal Article
• Language: English
• Published: Bingley Emerald Publishing Limited 30-10-2018; Emerald Group Publishing Limited
• Subjects: Central banks; Cointegration analysis; Computer simulation; Decision making; Economic models; Eigenvalues; Empirical analysis; Housing; Housing prices; Interest rates; Markets; Monte Carlo simulation; Pricing; Real estate financing; Brazil; Hong Kong China; Rio de Janeiro Brazil; United Kingdom > UK; United States > US; China; R20; C00; Housing market analysis; Housing prices; Brazil; G12; Housing; Monte Carlo simulation; Linear cointegration; Rational bubbles
• ISSN: 1753-8270; 1753-8289
• DOI: 10.1108/IJHMA-08-2017-0075

Purpose
Housing prices in Brazil have displayed an impressive growth in recent years, raising some concerns about the existence of a bubble in housing markets. In this paper, the authors implement an empirical methodology to identify whether or not there is a bubble in housing markets in Brazil.
Design/methodology/approach
Based on a theoretical model that establish that, in the absence of a bubble, a long-run equilibrium relationship should be observed between the market price of an asset and its dividends. The authors implement two methodologies. First, the authors assess whether there is a cointegration relationship between housing prices and housing rental prices. Second, the authors test whether the price-to-rent ratio is stationary.
Findings
The authors’ results show that there is evidence of a bubble in housing prices in Brazil. However, given the short span of the data, the authors perform a Monte Carlo simulation and show that the cointegration tests may be biased in small samples. Therefore, the authors should be caution when assessing the results.
Research limitations/implications
The results obtained from the cointegration analysis can be biased for small samples.
Practical implications
The information on the excessive increase of the prices of the properties in relation to their fundamental value can help in the decision-making on investment of the economic agents.
Social implications
These results corroborate the hypothesis that Brazil has an excessive appreciation in housing prices, and, as Silva and Besarria (2018) have suggested, this behavior explains, in part, the fact that the central bank has taken this issue into account when deciding about the stance of monetary policy of Brazil.
Originality/value
The originality is linked to the use of the Gregory-Hansen method of cointegration in the identification of bubbles and discussion of the limitations of the research through Monte Carlo simulation.