Investigating the Mechanism of Monetary Policy Impact on the Urban Housing Sector of Islamic Countries )Case Study of Iran(
Subject Areas : Islamic urbanism
یوسف لطفی
1
,
عباس شاکری
2
*
,
تیمور محمدی
3
,
فرهاد غفاری
4
1 -
2 -
3 -
4 -
Keywords:
Abstract :
Investigating the Mechanism of Monetary Policy Impact on the Urban Housing Sector of Islamic Countries )Case Study of Iran(
Yosef Lotfi *
Abbas Shakeri**
Teymor Mohammadi***
Farhad Ghafari****
The main objective of this study is to analyze the effects of monetary policy on the urban housing sector of Islamic countries (case study of Iran) in terms of changes in ownership and rental rates through autoregressive models, shock response functions, and variance analysis during the years 1376 to 1401. A country's economic policies include various policies such as monetary policy so that the society can achieve goals such as growth, development, and social welfare. The impact of monetary policies on housing, as one of the primary needs and requirements of household welfare, in addition to production and employment, is important. In this article, the model used includes the monetary base variable, liquidity, and housing variables. To identify and time the monetary transfer mechanisms, autocorrelation models (VAR) were used due to their widespread use and their ability to display the dynamics of variables using shock and response functions, the response of model variables, and the dynamics of economic changes and fluctuations. The results of the instantaneous response functions show that the response of the variable number of homeowners to the monetary base and liquidity shock has a wave-like effect. The relevant variable has a constant trend in the short run but a decreasing trend in the long run. The response of the variable housing supply cost to the monetary base and liquidity shock is an increasing trend but a decreasing trend in the long run. Also, the results of the variance analysis show that the monetary base and liquidity have a high contribution to the change in the variance of the relevant variables and the contribution of the monetary base to explain the change in the variance of the owners and tenants variable is increasing over the ten-year period, but the contribution of the monetary base and liquidity in the change in the variance of the housing supply cost is decreasing over the period under study.
Keywords: Housing market, urban housing, shock response functions, monetary policies, liquidity
Introduction
Among the legal and regulatory measures of the government, one can mention economic policy. A country's economic policies include various policies such as monetary policy, fiscal policy, income policy, trade policy, stabilization policy, and exchange rate policy. Each of these policies pursues its own specific goals so that society can achieve its macro-economic goals, namely growth, development, and social welfare.
A look at global experiences shows that government policies play a decisive role in the housing market, and monetary policies are of great importance in achieving the intended goals, considering the most important tools.
One of the most important channels of monetary policy's impact, as a durable asset, is the asset price channel and the housing price channel. The housing market is one of the economic markets in every country. In addition to being considered a valuable and consumable asset for individuals in society, housing plays an important role in the economies of countries.
since every good and service in the economy is examined from two dimensions of investment and consumption, in most countries housing also has two dimensions of consumption and investment, and most people consider housing as a place of residence and a tool for long-term savings. Decision-making about housing depends on the amount of current and future income of each individual, and a kind of inter-period substitution occurs in the way people consume, and as mentioned, the share of housing constitutes a significant share in the household basket, which will cause a change in the household basket.
Among the basic economic and social challenges is the continuous increase in rent and its disproportion to household income, which puts great pressure on tenants. In addition to financial problems, this situation also has psychological and social consequences, so that the statistics and analyses presented indicate the undesirable situation and deepening of the housing crisis in Iran, especially in the urban sector.
The study conducted in this research also shows the impact of monetary policies on the housing sector in terms of ownership and rental. The study of the effect of monetary policy on the urban housing sector of Islamic countries examined the change in the pattern of housing use (purchase of housing - rental) in Iran during the years 1376 to 1401.
Theoretical Basis
Economists have mentioned several channels through which changes in monetary policy can affect real variables in the economy. In general, monetary transmission channels are classified into three main groups as follows: 1- The traditional interest rate channel 2- The price channel of other assets 3- The credit channel
The transmission of monetary policy effects through the interest rate mechanism is perhaps the most famous transmission channel, but subsequent research has shown that consumer decisions regarding housing and other durable goods expenditures are also investment decisions, which include both investment and expenditure on durable consumer goods, and the interest rate channel affects consumer spending in addition to investment.
An increase in housing prices causes its price to rise relative to the replacement cost, thus stimulating housing production. Housing prices are one of the most important components of wealth, so an increase in housing prices increases wealth and through that, consumption can increase, so an expansionary monetary policy that increases housing prices can increase aggregate demand.
By increasing and decreasing the volume of money in the economy, the money supply changes and leads to a change in the interest rate. In other words, when a monetary shock occurs, by changing interest rates, it affects the opportunity cost of holding durable goods, including housing, and thereby affects a part of the demand that arises from the demand for services resulting from this characteristic of housing. This demand can be examined from two aspects:
- Demand for residential services as a durable good
- Demand for housing as an asset
Therefore, by applying a contractionary monetary policy, the interest rate increases and by increasing the opportunity cost of holding housing, the demand for housing decreases.
Higher interest rates increase the cost of building new homes and reduce residential investment and housing construction activities. Therefore, interest rates have important effects on housing construction and ultimately housing supply, and a decrease in housing supply will lead to an increase in housing prices.
As interest rates increase, the demand for housing decreases, which causes housing prices to decrease, and on the other hand, as interest rates increase, the supply of housing decreases, which causes housing prices to increase. Therefore, the final effect of changes in interest rates on housing prices is ambiguous.
Regarding the wealth effect, consumption is a function of income and wealth, and savings are a direct function of income and an inverse function of wealth. Since housing is an important component of wealth, when housing prices increase, household wealth increases, providing the situation for more consumption and an increase in aggregate demand, and aggregate output increases.
Changes in building prices cause changes in rental income in the rental housing market. An increase in rental income for landlords neutralizes the negative effect of a decrease in income from tenants. The size of this channel will depend on the structure of rental housing, the performance of the rental housing market, and the various responses of individuals (institutions, landlords, and owners).
An increase in house prices is likely to have a positive saving effect on household planning. The strength of this effect also depends on the saving ratio.
Research Method
Macrometric models are models that researchers have used to examine and measure the effects of variables on economic activities. The goal of economists in designing and using macroeconometric models has been to further compare the impact of monetary and fiscal policies on real macroeconomic variables. In this study, an autoregressive model was used to examine the impact of monetary policies on the housing sector.
Based on an autocorrelation model that includes urban homeowners and owners nationwide and tenants nationwide and urban tenants and monetary variables. The impact of monetary policy is measured through response functions. Autoregressive models (VAR) are a set of regression models that can be considered as a kind of link between univariate time series models and simultaneous equation models.
In general, it can be said that the VAR model is a statistical model and therefore it is based on statistical theories and its assumptions, so the purpose of defining the equation is only to express the distribution, reaction, and dispersion of variables relative to each other, not to estimate and estimate parameters. A notable point in this study is that the causality test will not be used because Granger causality examines the causality relationship based on the relationship between the current values of one variable and the past values of another variable.
Conclusion
Given that housing annually absorbs a large volume of the country's liquidity and this sector is high in the country's GDP. For this reason, identifying the factors that cause shocks in the housing sector should be of concern to economic policymakers. Given that the optimal use of monetary and fiscal policies can lead to solving the housing problem, this article attempts to examine the effect of monetary policies on the status of urban housing in Islamic countries (case study of Iran) using an autoregressive model and instantaneous response functions. Variables related to monetary policies and the housing sector were considered seasonally and in the period 1376-1401.
The results showed that the response of the variable number of urban owners and the entire country to the monetary base and liquidity shock has a wave-like response and does not show any noticeable changes in the short term compared to monetary policy, but the instantaneous response of the number of urban tenants and the entire country has an increasing trend in the short and long term. The response of urban and total housing supply costs to a monetary base shock in the short and medium term has an increasing trend.
The results of variance analysis show that over a ten-year period, the monetary base has a high share in the change in the variance of the number of urban owners and tenants and the entire country. The share of liquidity over a ten-year period has a high share in the change in the variance of the number of urban tenants and the entire country. Due to the increase in inflation, consumer purchasing power will decrease. On the other hand, since housing has a high share in the household budget, housing purchases will decrease and households will move towards renting. In the end, it should be focused on adopting monetary policies with greater precision. Given that the purpose of implementing monetary policies is to improve macroeconomic variables in line with economic policies, the effects of policies should not necessarily be of interest to policymakers in the area of total economic production and the trend of price changes in the economy, and other sectors (including the housing sector in general and in the urban area) are also affected by the implementation of these policies.
References
Agha, Asif Idrees, Noor Ahmed, Yasir Ali Mubarik, and Hastam Shah. "Transmission mechanism of monetary policy in Pakistan." SBP-Research Bulletin 1, no. 1 (2005): 1-23.
Battistini, N., Falagiarda, M., Hackmann, A., & Roma, M. (2024) "Navigating the housing channel of monetary policy across euro area regions". European Economic Review, 104897.
Science, Vol. 1, no.20, pp1-12.
Panahi, Hossein and Behboudi, Davood and Asgharpour, Hossein and Keshtkaran, Najmeh (2018) Studying the effects of monetary policy shocks on the housing sector in the framework of a dynamic stochastic general equilibrium model. Urban Economics, 3 (2), 1-18
Tamalki, Hossein and Ahmadvand, Meysam. (2014) Prioritizing Islamic housing financing techniques in the country's banking system using the VICOR method. Journal of Islamic Finance Research. Fall and Winter 2014 - Issue 4 (21 pages - from 57 to 77)
Shahnazi, Ruhollah and Rostamzadeh, Parviz and Pourmola, Seyed Mohammad Hashem and Balya, Maryam. (2019) Housing financing for low-income groups through endowment-based cooperatives. Journal: Economic Research. Spring and Summer 2019 - Issue 31 Rank: B (71 to 89).
Shirzadi Javid, Ali Akbar (2022) Global approaches to policy-making in the field of housing provision with emphasis on low-income groups, Majles Research Center, Office of Infrastructure Studies, Serial No. 18637
Moshiri Saeed and Washeghani Mohsen. (2010) Investigation of the monetary transmission mechanism and its timing in the Iranian economy. Quarterly Journal of Economic Modeling. No. 1. (11) 32-1.
Mahdilou, Ali and Asgharpour. Hossein and Fallah, Firouz (2019) Nonlinear transmission mechanism of monetary policy through the housing price channel in Iran: MSVAR approach. Quarterly Journal of Economic Research and Policies No. 90. Year 27 (455-499)
Miles, W., & Zhu, X. (2023) Housing and the changing impact of monetary policy. International Review of Economics & Finance, 86, 587-603
* Ph.D Student in the field of economic sciences, Department of Economics, Faculty of Management and Economics, Science and Research Unit, Islamic Azad University, Tehran, Iran.
yousef.lotfi@iau.ir
** Corresponding Author: Professor of the Department of Economics, Faculty of Economics, Allameh Tabatabai University, Tehran, Iran.
Shakeri.abbas@gmail.com
mohammadi@atu.ac.ir
farhad.ghaffari@yahoo.com