House Price Dynamics and Consumer Sentiment in an Era of Destabilizing Macroeconomic Conditions: Empirical Evidence from Türkiye

Abstract

This study analyzes changes in the connectedness of 26 regional house prices in Türkiye and determines how consumer sentiments affect connectedness in the era of destabilizing macroeconomic conditions over the period from January 2010 to April 2022. To this end, we estimate network connectedness using a Lasso VAR model and time-varying analyses using a rolling linear VAR model for the pre-crisis and post-crisis periods. Our empirical results provide evidence of a high connectedness of house prices, with a greater degree of connectedness witnessed during the post-crisis period across regions in Türkiye. The results further divulge that Ankara (region TR51) is a major transmitter of connectedness during the pre-crisis period, while Istanbul (region TR10) is a major transmitter of connectedness during the post-crisis period. By and large, our results show that the degree of connectedness is associated with the period of financial and economic destabilization, characterized by a significant depreciation of the local currency, rising inflation rates, and an increasing cost of borrowing accompanied by rising loan restructurings and defaults. Furthermore, the empirical results indicate substantial evidence of a positive impact of consumer sentiment on the degree of connectedness during the post-crisis period. These empirical results are validated by the results of the time-varying Granger causality tests.

Keywords: House prices, network analysis, connectedness, Granger causality, macroeconomic crisis, Türkiye

JEL Classification: R30, R32, E71, C32