Abstract:
Purpose:
This research investigates how Economic Policy Uncertainty (EPU) shocks impact housing
prices in Pakistan, focusing on both short-term and long-term effects. It also examines how
EPU shocks influence other key economic variables—such as the Stock Market Index,
Remittances, and Pakistan’s Gross Domestic Product (GDP)—and how these variables, in turn,
affect housing prices over time.
Design, Methodology and Approach:
The study uses monthly data from 2015 to 2024 for the EPU Index, Housing Price Index, Stock
Market Index, Remittances, and GDP which is sourced from various economic databases. The
research applies an unrestricted Vector Autoregression (VAR) model to assess the Variance
Decomposition of variables along with the Impulse Response Function (IRF) of EPU shocks
on housing prices. To ensure robustness, the study applies a Structural Vector Autoregression
(SVAR) model to isolate the exogenous effects of EPU and evaluate its direct impact on
housing prices.
Findings:
The results show that EPU shocks initially cause housing prices to decline in the short term.
However, over the long term, housing prices tend to recover and increase. The research also
shows that in remittance-dependent economies like Pakistan, during times of economic
uncertainty, investors redirect their investments from volatile assets, such as stocks, to safer
investments like housing market. The study also shows that GDP falls in response to EPU
shocks, with its recovery beginning after a quarter whereas, housing prices tend to recover
earlier, therefore, housing prices outpace overall economic growth.
Significance:
The study highlights the economic uncertainty coupled with the housing crisis in Pakistan,which is driven by rapid urbanization, low affordability, high population growth, and a large
housing deficit. The findings provide valuable insights for policymakers, investors, and
potential homebuyers to address the issue. It offers recommendations to improve affordability,
reduce the housing deficit, and manage the impacts of economic uncertainty on the real estate
market
