Investigating the Role of Economic Policy Uncertainty Shocks on Housing Prices in Pakistan: A Vector Autoregression (VAR) Approach

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