Relationship between Housing Price Index and Consumer Price Index in Saudi Economy: A Vector Autoregression Approach

Abstract

This is a pioneering attempt to examine the existence of the causal relationship between the housing price index (HPI) and the consumer price index (CPI), in Saudi Arabia. Vector Autoregression (VAR) approach has been used to analyze the data during the period 2013:1-2022:2. Granger Causality tests, variance decomposition analysis, and impulse response functions have also been employed to explore the nature of that relationship. The VAR estimates reveal that the CPI has an inverse relationship with the HPI in the first three lags out of five lags. The analysis of variance and response functions shows that CPI has a high explanatory power over changes in HPI (more than 48%), especially in the short run compared to the long run. The causal tests of Granger show that CPI does Granger cause housing prices index (HPI), and consequently, it suggests that inflation can serve as a precursor to future housing prices. The paper emphasizes the importance of future studies and research in this field.