This study aims to explore the impact of monetary policy on house prices in Pakistan.
This study uses monthly time-series data of house prices, monetary policy, inflation and stock market index ranging from January 2011 to December 2016. All the series were checked for stationarity by using augmented Dickey–Fuller test, and lag length of 11 was decided on the basis of Schwert’z rule of thumb. Vector autoregressive (VAR) model was used because the series were not co-integrated.
The analysis revealed that monetary policy significantly affects house prices in Pakistan. Tight monetary policy results in lower house prices and vice versa. The relationship between monetary policy and house prices is unidirectional. The study also finds that higher inflation also leads to soaring house prices, but the variation in stock market index does not affect house prices.
To the best of authors’ knowledge, none of the existing studies explores the impact of monetary policy on house prices in Pakistan. The findings help investors and policy makers to understand the relationship between monetary policy and house prices to make better decisions.
