Economic policy uncertainty and German residential house prices: evidence from time-varying Granger causality

Abstract

Purpose This paper aims to investigate the dynamic relationship between economic policy uncertainty (EPU) and housing prices (HPI) in Germany. It focuses on identifying episodes in which uncertainty shocks shape housing market dynamics rather than reacting to them. The analysis pays particular attention to events such as Brexit, the COVID pandemic and recent shocks to energy prices and interest rates. Design/methodology/approach Using monthly German data from 2014:M01 to 2025:M06, the study estimates a vector autoregression for housing prices, EPU and the bank lending rate. Parameter stability tests afterwards assess whether these relationships can be treated as constant over time. As the tests indicate clear time variation, a bootstrap rolling window Granger causality approach is used to trace how the direction of influence between EPU and HPI changes around major shocks. Findings The results reveal a nuanced, context-dependent relationship between EPU and the housing market. In the full sample, Granger tests indicate that movements in house prices precede changes in EPU. Rapid housing price increases appear to have spillover effects, leading to policy debates rather than EPU guiding housing market developments over time. Research limitations/implications The analysis is limited to Germany, which restricts the generalizability of the findings to other countries with different housing market dynamics. Additionally, the study uses aggregate national-level data, which may obscure regional differences in housing market responses to EPU. Future research could explore regional heterogeneity and expand the analysis to multiple countries or use disaggregated data to understand local housing market behaviors more thoroughly. Practical implications Policymakers can use the findings to better understand the cyclical impacts of EPU on housing markets. By focusing on specific episodes where policy uncertainty interacts with house prices, the research highlights the need for clear and stable housing regulations, particularly during times of significant uncertainty. The results suggest that predictable housing market policies could help mitigate housing price volatility and reduce uncertainty. Social implications The study contributes to understanding how EPU influences social stability, particularly in housing affordability. As HPI are a major social concern, clear and stable policies could reduce public uncertainty, particularly in times of economic and political stress. This would help in ensuring that housing markets are more resilient to external shocks, benefiting both homeowners and renters in Germany. Originality/value The article brings together parameter stability tests and bootstrap rolling-window Granger causality, focusing on an event-based relationship between EPU and house prices in Germany. This research actively supports policymakers and market participants to evaluate episodes of uncertainty that either dampen housing activity or solely reflect worries about affordability.