Abstract

This paper investigates empirically the relationship between stock market prices and house prices in Saudi Arabia. Using yearly data for the period from 1985 to 2012 we conducted a Granger-causality test, Impulse response functions and Variance decompositions that were simulated from the estimated unrestricted vector autoregressive (VAR). Results suggest that stock market and economic growth play a major role in determining house prices. Granger causality results show that stock market prices and the economic growth have a causal impact on house prices. Impulse response functions indicate there is a negative relationship between stock market prices and house prices and also there is a positive relationship between economic growth and house prices. Variance decompositions show that the stock market prices is the most important variable that explains the variation of house prices, followed by economic growth.

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