Determinants of Housing Prices in an Oil Based Economy

Abstract

This paper is trying to analyze the determinants of housing prices in an oil-based economy, where the price of oil plays a major role in such economies. It is also common to find that government spending represents the most important component of aggregate spending and that governments usually play a central role in the provision of public services to citizens at substantial subsidies, housing is on top of them. The paper is trying to identify the role played by oil price in the housing market in Kuwait. The model is composed of four major determinants of house prices including the price of oil, government expenditures, inflation rate and interest rate. Results confirm the role played by the four factors in determining the price of houses. Variance decomposition indicates that up to 10 quarters, 94.3% of the forecast error variance in housing prices is explained by house price itself, whereas, only 2.3%, 1.6%, 1.5% and 0.8% are explained by Interest rates, inflation rates, government expenditures, and price of oil respectively. The oil price does not seem to play an important impact on price changes in Kuwait. One important recommendation is for the government to relax its monopoly on land and invite the private sector to come up with housing solutions to increase the supply of houses in the private housing market and reduce the upward pressures on house prices.