The Impact of Exchange Rate Volatility on the Housing Price Index in Iran: A GMM Time Series Approach

Both on micro and macro scales, the exchange rate and its dynamics play a pivotal role as influential variables in the economy. They can affect most economic, social, and cultural variables through various channels and change their behaviors. Given the importance of the exchange rate as a key variable in the Iranian economy, extensive studies have been conducted on the exchange rate and the associated concerns regarding exchange rate volatility. The rate affects many of the government's economic policies. In addition, since housing costs constitute the main household expenses in Iran, problems and limitations in providing housing can have a significant impact on the spread of social dissatisfaction. The purpose of this study is to investigate the effect of exchange rate instability on the housing price index in Iran. Therefore, analyzing the relationship between the exchange rate market and the housing market can help policymakers and economic decision-makers adopt appropriate policies in the foreign exchange market and housing sector.

In this study, the GARCH method was initially used to estimate the volatility of the exchange rate. Next, to investigate the effect of exchange rate instability on the housing price index from 1991 to 2020, the GMM time-series method was employed. Due to the dynamic nature of the model in this study and the need to establish conditions for generalized moment estimators, the use of this method seems appropriate. The GMM method is used for linear time-series models to ensure the conditions of moment estimators and incidental properties.

The results showed that the volatility of the exchange rate has a negative and significant effect on housing prices. Also, it was found that the interruption of the housing price index, oil revenues, inflation rate, liquidity, and urbanization all exert a notable and positive influence on housing prices. Additionally, the study's findings revealed a significant and adverse effect of variables such as interest rate, gold market return, and stock market return on housing prices within Iran's economy. The results of the tests used demonstrated that the estimation model is in a suitable condition in terms of statistical indicators.

Exchange rate volatility is of the parameters affecting housing prices. Accordingly, this study concludes that exchange rate volatility harms the housing price index in Iran. It is recommended that the central bank adopt appropriate currency policies to reduce volatility in the currency market and its effect on parallel markets, including the housing market. The results of estimating the coefficients of control variables are consistent and in line with the theoretical and empirical literature. Variables such as inflation rate, liquidity, and urbanization have a positive and significant effect on the housing price index. With an increase in liquidity, the housing price index in the Iranian economy increases, indicating that expansionary monetary policies have significant effects on the housing market in Iran.