Exchange Rate Volatility and House Prices in the Eastern European Countries

Abstract We analyzed the causal relationship between exchange rate volatility and house prices in 11 Eastern European countries. Exchange rate volatility was modelled using a GARCH framework, while the determinants of house prices were estimated with the GMM method. Based on quarterly data covering the period from 2004 to 2024, we established that exchange rate volatility effects on house prices are quite heterogeneous, with a statistically significant positive effect in 7 countries and a negative effect in 4 countries. However, there is a predominantly dampening effect of exchange rate depreciation on house prices, except Slovenia and Latvia. Among other findings, house prices exhibit inertia, which could be interpreted as the presence of speculative motives among market participants. An inverse relationship between interest rate and house prices is a distinct feature of countries with a floating exchange rate regime. Higher output abroad exerts an upward pressure on house prices in 5 countries, with the opposite effect in 3 countries. The real exchange rate misalignment is significant for house prices in eight countries. Joining the eurozone is likely to increase house prices. Main findings remain robust under different specifications of explanatory variables and the exchange rate volatility determinant.