Abstract
Housing is one of the key sectors of the economy that, beyond fulfilling the need for shelter, serves as a durable asset and a store of wealth. Due to its medium- and long-term combination of risk and return, housing has become an attractive investment—particularly in developing countries—often substituting for other asset classes. This dynamic has driven rising housing prices and intensified price volatility. Economic growth and stability, as major macroeconomic indicators, are highly sensitive to such fluctuations. This study investigates the effects of housing price volatility and the asymmetric impact of positive and negative price shocks on economic growth and stability across Iranian provinces over 2005–2021. The Panel Dynamic Ordinary Least Squares (PDOLS) estimator was employed to assess the impact of housing price changes on economic growth, while the Fixed Effects (FE), PDOLS, and Pooled Mean Group (PMG) estimators were used to examine their effects on output volatility, as a proxy for economic instability. The results reveal that housing price increases have a significant positive impact on economic growth, whereas price declines exert a stronger negative effect—highlighting the asymmetric nature of the impacts of housing price shocks. Moreover, housing price volatility amplifies output volatility, thereby undermining economic stability. These findings confirm the central role of the housing market in Iran’s economy and underscore the need for proactive, evidence-based policies to mitigate housing market fluctuations and enhance macroeconomic resilience.
Purpose/Aims:
The housing sector is a vital component of national economies, particularly in developing countries, where it often functions as both shelter and investment. In Iran, housing is perceived as a relatively secure asset due to underdeveloped financial markets and persistent inflation. This perception fuels continuous demand and contributes to housing price increases and volatility. These dynamics carry broader macroeconomic consequences. Housing markets are closely linked to consumption, investment, credit access, and employment. Thus, fluctuations in housing prices may significantly influence economic growth and stability. While many studies have addressed the relationship between housing prices and growth, less attention has been paid to the asymmetric effects of price increases and decreases, or to the role of housing price volatility in shaping economic stability. This study aims to fill that gap by investigating the effects of housing price changes and volatility on provincial economic growth and stability in Iran from 2005 to 2021. It particularly explores whether the effects of price increases differ from those of price decreases and examines how volatility in housing prices contributes to macroeconomic instability.
Methodology & Framework:
The study employs provincial panel data for 31 provinces in Iran from 2005 to 2021. Economic growth (measured by changes in real GDP) and economic stability (measured by output volatility) are used as the two dependent variables. The main independent variables are housing price growth and housing price volatility. Additional explanatory variables include population growth rate, labor force participation rate, and government expenditure, which are included to control for macroeconomic conditions at the provincial level. To estimate the long-run effects of housing price changes on economic growth, the Panel Dynamic Ordinary Least Squares (PDOLS) method is used, which accounts for cointegration and dynamic relationships between variables. In addition, to evaluate the effect of housing price volatility on economic instability, the study applies three econometric techniques for robustness: Fixed Effects (FE), PDOLS, and Pooled Mean Group (PMG). To explore asymmetry, housing price changes are divided into positive and negative movements, allowing for the estimation of their separate impacts on growth. This enables the identification of whether the economy responds differently to housing booms and busts.
Findings:
The results indicate that housing price changes have a positive and statistically significant impact on economic growth in Iranian provinces. This confirms the role of housing as a stimulus for economic activity through wealth generation and enhanced access to credit, which leads to greater consumption and investment. However, the analysis reveals an asymmetric relationship: while positive changes in housing prices stimulate economic growth, negative changes (i.e., price declines) have a stronger and more harmful effect. This suggests that downturns in the housing market can lead to sharp reductions in household wealth perception and investment confidence, resulting in more pronounced slowdowns in economic activity. In terms of economic stability, the study finds that housing price volatility increases output volatility, indicating a destabilizing effect. Provinces that experience greater fluctuations in housing prices are also more exposed to economic uncertainty and instability. This is particularly significant in Iran, where the housing and construction sector constitutes a considerable share of GDP and employment. Price volatility disrupts investment planning and leads to uncertainty in the broader economy, affecting both producers and consumers. Other findings show that labor force participation has a dual role: it supports economic growth and simultaneously helps reduce instability. Conversely, higher population growth and increased government expenditure are found to reduce growth and contribute to economic instability at the provincial level.
Discussion:
The results reveal the dual role of housing prices in Iran’s economy. While rising housing prices support economic growth through higher consumption and investment, price volatility and downturns generate significant macroeconomic risks. The analysis confirms an apparent asymmetric effect: negative housing price shocks have a more substantial adverse impact on economic growth than the positive effects of price increases. Moreover, housing price volatility amplifies output volatility, suggesting that fluctuations in the housing market are a key source of economic instability. These findings highlight the central role of housing markets in shaping both growth and stability in a developing-country context.
Conclusion & Implications:
This study concludes that housing price dynamics are a critical determinant of economic performance in Iran. Policies should therefore focus on mitigating housing market volatility and limiting the adverse effects of price declines. Targeted support for housing supply, regulation of speculative demand, improved land management, and coordination between housing and macroeconomic policies are essential to enhance stability. Stabilizing the currency and managing inflation expectations can further reduce the risk of housing bubbles. Overall, incorporating housing market dynamics into regional and national development strategies is crucial for achieving sustainable and stable economic growth.