Turkish Housing Market Dynamics: An Estimated DSGE Model

Abstract

In this article, we investigate the underlying driving dynamics behind house price variations in Turkey by estimating a dynamic stochastic general equilibrium (DSGE) model in which the housing market and collateral constraints are included. The model also analyses the interaction between macroeconomic variables and the housing market by making policy simulations under different loan-to-value (LTV) ratios, which are used as a housing market-specific economic policy tool. The model is extended by including the traditional Taylor rule with house prices for representing monetary policy. Our findings show that house prices in Turkey are largely explained by housing preference shocks. Besides, we find that monetary policy shock plays a small role in determining the variables of the housing market in the short-term period. However, the magnitude of the impact of housing market shocks on the rest of the economy depends on the LTV ratios. The higher the LTV ratio, the higher are the effects of the government's housing policy instrument for stabilising the housing market on real macroeconomic variables such as consumption and output in Turkey. Finally, our findings show that the fluctuations in house prices have not played a substantial role in the monetary policy reaction function of Turkey.