The dynamics of crude oil price and the real estate market in Saudi Arabia: A Markov‐switching approach

• Published date: 01 May 2021
• Author: Andrew Adewale Alola
• Date: 01 May 2021
• DOI: http://doi.org/10.1002/pa.2178

ACADEMIC PAPER

The dynamics of crude oil price and the real estate market

in Saudi Arabia: A Markov-switching approach

Andrew Adewale Alola

1,2,3

1

Department of Economics and Finance,

Istanbul Gelisim University, Istanbul, Turkey

2

Aviola Consult Ltd, Lagos, Nigeria

3

Department of Financial Technologies, South

Ural State University, Chelyabinsk, Russia

Correspondence

Andrew Adewale Alola, Department of

Economics and Finance, Istanbul Gelisim

University, Istanbul, Turkey.

Email: aadewale@gelisim.edu.tr

The volatility evidence of the International crude oil prices has overtime been linked

to the dynamics and sector performances of states' economies. By employing the

Markov switching regression model over daily time series data from October 3, 2005

to March 29, 2018, this study examines the response of the Saudi Arabia real estate

market to the crude oil price dynamics. An empirical observation revealed that there

is statistical evidence of significant and positive impact of crude oil price return on

the real estate market in the regimes. Am empirical evidence shows that the impact is

higher in Regime 2 even as the global factor (proxied by volatility index) is evidently

significant. Although the regimes are persistent, the expected regime duration of the

stable regime is of the higher quarter. This investigation is statistically significant and

robust, especially when OPEC price of crude oil is used in lieu of the Europe Brent

price. By a further estimation techniques, it affirms that the model exhibits non-

linearity rather than a linear relationship. The estimation result encourages more

strict energy policies such as the implementetion of energy diversification policy

among others, thus rendering a panacea to Saudi Arabia's energy and the real estate

challenges.

JEL CLASSIFICATION

C32; O53; Q41; R31

1|INTRODUCTION

An observatory occurrence is that market observations have contin-

ued to align the housing market contextual studies with the last

financial and economic crisis that plagued the U.S. economy into

recession (and subsequently the global recession). Since the global

meltdown of the economy in the 1930s, a worst crisis of such was

not experienced until the 2007 global economic crisis. This recent

experience of the financial crisis was largely reported to have caused

the housing market meltdown, as triggered from the subprime mort-

gage crisis (André, Bonga-Bonga, Gupta, & Muteba Mwamba, 2017).

Also, recent extant literature has shown linkages in the volatility of

housing market dynamics and uncertainty indices (Alola, 2019a;

André, Bonga-Bonga, Gupta, Mwamba, & Weirstrasd, 2015; Burn-

side, Eichenbaum, & Rebelo, 2016; Christou, Gupta, & Hassapis,

2017; Ongan & Gocer, 2017). Specifically, Burnside et al. (2016)

relate uncertainty with demand for housing and found that

uncertainty affects housing returns. Also, André et al. (2017)

expressed the tendency of high uncertainty to cause volatility

increase in house price as well the return to risk properties of prop-

erty investment. The study of the impact of uncertainty on housing

market vis-à-vis housing prices is highly informative to prospective

homeowners, financial institutions, economic planners, policymakers,

and real estate and property developers. Hence, effective modeling

of the housing market (using precisely the market indicators) and the

market determinants is fundamental to the dynamics of the sectors

of the economy. Moreover, the perspective of informational trans-

mission, spillover effects, and the use of other econometric tools

have been applied to the nexus of the real estate (volatility or

returns) and the oil prices volatility (Ji, Marfatia, & Gupta, 2018;

Nazlioglu, Gormus, & Soytas, 2016).

Given this motivation, the study adopts the housing market-

consumption insightful knowledge from Simo-Kengne, Miller, Gupta,

and Aye (2015) and the housing-energy dynamics study of Nazlioglu

Received: 5 September 2019 Revised: 5 December 2019 Accepted: 5 May 2020

DOI: 10.1002/pa.2178

J Public Affairs. 2021;21:e2178. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons, Ltd 1of8

https://doi.org/10.1002/pa.2178