Forecasting the dynamics of the Istanbul real estate market with the Bayesian time-varying VAR model regarding housing affordability

Abstract

The dynamics that have led to the dramatic increase in the Istanbul housing market in recent years have revealed housing affordability concerns. Although the dynamics affecting housing market disruptions are generally attributed to demand and supply side factors, it is also necessary to take into account the macroeconomic factors causing this. We concordantly demonstrate the strong connections between the increase in housing prices and the dynamics affecting this increase by observing the recent developments in the Istanbul housing market. We then utilize a time-varying approach by transforming a linear model into a nonlinear model to investigate the mechanisms underlying this relationship. Afterward, we observe the impulse-response graphs. On the supply side, increases in construction costs and builders' sales price expectations augment real housing prices. However, excessive borrowing by construction companies has a decreasing impact on prices. On the demand side, housing prices in Istanbul grow because mortgage interest rates decrease and housing sales to foreigners and refugee migration increase. In the macroeconomic sight, real exchange rate, inflation, growth rate, and money supply boosts enhance prices. At the same time, housing prices rise as long as the unemployment rate and policy interest decrease. While housing prices respond most to construction costs among supply and demand variables, they react to money supply among macroeconomic variables. Eventually, after all our findings, we recommend socioeconomic policies for housing affordability problems.