Modeling housing prices and volatility in Turkey

As experienced during the 2008 Global Financial Crisis, the housing market can trigger economic growth, but it can also lead to deep recessions that spread rapidly. Rapid increase of house prices and its volatility in the last years for Turkey have increased the interest of researchers and policymakers in this area. This paper analyzes the determinants of house prices and house price volatility in Turkey through an AR(1,1)-TGARCH(1,1) model that takes into account the heteroskedasticity. In the model, for the period between January 2010 and December 2021, economic growth, inflation rate, exchange rate return and mortgage interest rate are taken as demand-side variables affecting house prices, while the number of occupancy permits is used as an indicator of housing supply. The empirical findings indicate that there is a positive relationship between house prices and inflation, and house prices and real output; a negative relationship between home loan rate and exchange rate basket, and a negative but insignificant relationship between housing supply (number of occupancy permits). Moreover, the volatility in the house price index is determined by long-run shocks rather than short-run shocks. The asymmetric effect of the volatility in the house price index is negative, but not statistically significant. In other words, negative and positive shocks do not have a distinctive effect on house price volatility. Results of the model show that mortgage interest rates have an impact on house prices in Turkey. Therefore, the effects of the decisions taken in the housing sector on mortgage interest rates, and their effect on growth, exchange rates and inflation should be carefully evaluated.