Revisiting the housing market dynamics and its fundamentals: new evidence from Cyprus

Abstract

PurposeStudies have shown that economic expansion is characterized by the activities in the productive and industrial sectors. And, recently, the Republic of Cyprus has consistently experienced a relative economic growth. In this light, the current study revisits the dynamics of the housing market and its fundamentals for Cyprus using the quarterly data from 2005Q1 to 2016Q4.Design/methodology/approachProducer price and industrial production indices were employed along with the gross domestic product per capita and urban population as control variables. The empirical technique employed is the dynamic and fully modified ordinary least square approaches where unobserved factors are potentially controlled.FindingsEmpirical evidence of long-run relationship exists between the observed indicators and the house price. Indicatively, statistical evidence reveals a positive and significant long-run relationship between the producer price index and the house price. In a similar manner, there is a strongly significant but a negative long-run nexus of industrial production index and the house price. And, expectedly, the observed long-run nexus of the house price and each of real gross domestic product per capita and the urban population is positive and significant. Interestingly, there exists significant unidirectional Granger causality from each of the independent variables to the housing price. Lastly, the robustness check and the diagnostic test of the investigation suggest a very consistent result and stable model with no problems of serial correlation and heteroskedasticity.Research limitations/implicationsThe fragility of Cyprus's housing market suggests the need for the adoption of an effective policy framework.Originality/valueAlthough the housing market has been studied in the context of the Republic of Cyprus, the novelty is hinged on the joint incorporation of the industrial and producer price indices in a housing model of the study.