Comparing the Effect of Exchange Rate Shocks on Activities of Housing Sector in Tehran and Mashhad Cities

Document Type : Original Article

Authors

• Saeid Darab ¹
• Malihe Hadadmoghadam ²
• Pedram Davody ³

¹ Ph.D Candidate, Institute of Management Studies and Management (IMPS)

² Assistant professor, National Institute for Population Research (NIPR), IRAN.

³ Researcher, Judicial Research Institute (JRI)

https://doi.org/10.22067/erd.2021.69188.1019

Abstract

Extended abstract
1- INTRODUCTION
The exchange rate is a linkage between domestic and foreign economies. Exchange rate shocks are the main cause of economic fluctuations in commodity-exporting countries like Iran. Considerably, the housing sector has played a crucial role in the urban economy. The housing sector boom drives the urban activities and prohibits unemployment and marginalization in advance.  Hence, the effect of exchange rate shocks on the activities of the housing sector could be supportive for policymakers. But different cities have dissimilar features so would be studied separately. To address this, the main aim of this study is to estimate the effect of exchange rate shocks on the housing sector in Tehran and Mashhad.
2- THEORETICAL FRAMEWORK
The macroeconomic situation may affect the housing sector paradoxically. There are several theories elaborating the effect of exchange rate shocks on the housing sector. On one side, the pull hypothesis says the inflationary condition move the housing sector toward a boom and vice versa. It emphasizes the positive effect of the exchange rate rises on the activities in the housing sector. According to this theory, when the assets price hikes, people tend to buy assets and save themselves from currency depreciation. Hence, this procedure pushes activities in all sectors including buildings. On the other side, the push hypothesis points that in the recession period, entrepreneurs would find the product input cheaper and it stimulates activities in subsectors of economy.
Another theory about the causality between the exchange rate and housing sector is the dutch disease and rational bubbles. This phenomenon leads to bubbles in housing (non-tradable goods) prices. Precisely, every exchange rate shock directly pushs up the price of buildings; therefore, building new houses grow up.
3- METHODOLOGY
This essay uses Factor-Augmented Vector Auto Regression (FAVAR). FAVAR is suggested for solving the limited information problem in VAR models and more variables can be used in these models. Our estimation is based on quarterly data during 1991-2018 for the housing sector of Tehran and Mashhad, also Iran macroeconomics variables.
4- RESULTS & DISCUSSION
According to the impulse-response functions, the exchange rate impuls cause the similar response in the most of the variables, but size and duration of responces differ gentely among the citites. In both Mashhad and Tehran, the land price grows more rapidly in the short –as a consequence of inflation expectation- and after some quarters, this growth is lost. It is noteworthy that the growth of land price and apartment price in Tehran is roughly two times greater in comparison to Mashhad. It indicates the Tehran housing market responde faster and greater to exchange rate shocks and inflationary situations. When it comes to the apartment price, the growth of this variable is less in comparison to the land price in these cities which is rooted in the inherent scarcity of land in metropolises.
The IRFs show a considerable difference between citities in response of the number of finished buildings and the area of finished buildings. While the number of finished buildings in Mashhad remained unchanged in the long run, the area has increased. Its illustrations that investors in Mashhad have a significant propensity to bigger apartments. It stemmed from increasingly huge construction costs and cheaper land prices in marginall and new areas of Mashhad. In this regard, Tehran face to an adverse situation. The growth of finished buildings numbers is more than the growth of area confirming that the investors will invest in smaller apartments in Tehran. Hence, outcomes elaborate that investor are willing to build bigger apartments in Mashhad city and smaller apartments in Tehran.
5- CONCLUSIONS & SUGGESTIONS
Exchange rate has an influence on biuliong sector and an impact on all of the urban activities through it. This essay trys to estimate this effect using FAVAR model and quartlerly data of Iran macroeconomic variables and also Tehran and Mashahd housing sector data during 1991-2018.  Results show exchange rate shock, propogate housing sector prices and acrtivities in both cities, but there is dissimilarity in the timing and size of effects. Study lay stress on the differences, and emphasize that distinctions should be considered by local policy makers and they should not imitate the capital city programs.

Keywords

• Housing Sector
• FAVAR Model
• Exchange Rate Shocks
• Mashhad Metropolis

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