ECONOMIC POLICY UNCERTAINTY AND HOUSING INVESTMENTS: AN EMPIRICAL VAR ANALYSIS FOR THE EURO AREA (EA-19)

The housing sector is considered one of the key factors of macroeconomic fluctuations. Consequently, analyzing the scale of housing investments within economies and identifying the primary drivers influencing these investments is of major importance. Since one of the variables determining investments is uncertainty, and housing investments are affected by uncertainty, it is important to determine to what extent uncertainty has an impact on housing investments. While many studies have examined the effect of uncertainty on housing prices and returns, the effect on housing investments has rarely been discussed. The dynamic impact of Economic Policy Uncertainty (EPU) on housing investments remains nearly unmentioned in the Euro Area-19 (EA-19). According to Real Options Theory, uncertainty leads to investment delays. If this relationship holds for the housing market, new construction investments should fluctuate in response to uncertainty, meaning that dwellings, which can serve as a proxy indicator for housing investments, may be affected by uncertainty. Therefore, this study investigates the relationship between the Europe-wide EPU Index and the EA-19 Dwellings Index by using monthly data (1994 M2-2023 M8). In the literature, this study is the first article to investigate the dynamic relationship between EPU and housing investments for EA-19 by performing Vector Autoregression (VAR) analysis. Based on the VAR analysis, the EPU index produces virtually no statistically significant effect on the dwellings index in the EA-19, although a unidirectional Granger causality from EPU to housing investment is detected. Based on this result, it is also possible to claim that political uncertainties in the EA-19 may not be one of the reasons for economic fluctuations due to housing investments. This study contributes to further research in this field, as it is the first study analyzing the effect of EPU on housing investments in the EA-19.