Non-Durable Consumption and Real-Estate Prices in Brazil: Panel-Data Analysis at the State Level

Abstract This paper investigates the effect of real-estate prices on non-durable consumption in Brazil. For that, we build a state-level panel of the determinants of non-durable consumption growth during the period 2008-2017. This period covers both a “boom” in real-estate prices and consumption (2008-2014) as well as a “bust” in them (2014-2017). We estimate the effect of house prices on consumption combining the techniques and ideas from Campbell e Cocco (2007) and Case et al. (2005). In particular, we estimated the same reduced-form equation proposed by Campbell e Cocco (2007), which is derived from simulating a theoretical model of housing and consumption choice under debt constraints. Due to Brazilian-data limitations, we were unable to run panel-data regressions at the cohort level (aggregation across households on different surveys) as in Campbell e Cocco (2007). Indeed, we had to resort to data aggregated at the state level to estimate our panel-data regressions as did Case et al. (2005). Our results suggest that changes in house prices significantly affect non-durable consumption in Brazil. The magnitudes are quantitatively close to the effects found for the U.K. by Campbell e Cocco (2007). Furthermore, we document that the effect of house prices on non-durable consumption is asymmetric, stronger in the “bust” than in the “boom” phase of the business cycle. This difference in the effects during different phases of the business cycle suggests that borrowing constraints might explain the effects of house prices on nondurable consumption.