A NONLINEAR ARDL ANALYSIS ON THE RELATION BETWEEN HOUSING PRICE AND INTEREST RATE: THE CASE OF MALAYSIA

Abstract

The purpose of this study is to examine the effect of interest rate on housing price index in Malaysia. A nonlinear Autoregressive Distributed Lags (NARDL) model has been applied for the period 1980Q1-1998Q1 and 1998Q2-2017Q1 to uncover the short run and long run effect of interest rate on Malaysia’s housing price index. Throughout the period of 1980Q1-1998Q1, the model of NARDL estimation indicated a significant long run positive relationship of interest rate increases to housing price index, and an insignificant long run negative relationship of interest rate decreases to housing price index. For the period of 1998Q2-2017Q1, the interest rate increases and the interest rate decreases are insignificant to influence the housing price index. This suggests that the role plays by the interest rate to explain the movement towards the housing price index in Malaysia is getting less influence than before.