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House prices
Are regional house prices stationary in
stationary in Iran? New evidence Iran

using Fourier quantile unit root test

Arash Hadizadeh 849
Department of Economics, Qazvin Branch, Islamic Azad University, Qazvin, Iran
Received 3 November 2018
Revised 25 February 2019
15 April 2019
11 June 2019
Abstract 27 June 2019
Purpose – In the Iranian economy, investing in the housing market has been very important and beneficial Accepted 1 July 2019
for investors and households, because of inflationary environment, low real interest rates, underdeveloped
financial and tax systems and economic sanctions. Hence, prediction of house prices is the main concern of
housing market agents in the economy. The purpose of this paper is to test the stationary properties of Iran’s
provinces to improve the prediction of future housing prices.
Design/methodology/approach – In this paper, the authors have tested the stationary properties of 20
Iran’s province centers over the period from 1993 to 2017 using a novel Fourier quantile unit root test and
conventional ordinary/generalized least squares (O/GLS) linear unit root/stationary tests.
Findings – According to conventional O/GLS linear unit root/stationary tests, most of the house prices
series exhibit random walk behavior, whereas by applying the Fourier quantile unit root test, the null
hypothesis of unit root is rejected for 15 out of 20 series. Other results indicated that house prices of cities
responded differently to positive and negative shocks.
Originality/value – Previous studies only addressed conventional OLS or GLS linear unit root or
stationary tests, but novel Fourier quantile unit root test was not used. New results were obtained based on
this unit root test, that, as a priori knowledge, will help benefiting from the positive effects, or avoiding being
victimized by the negative effects.
Keywords Quantile regression, House prices, Fourier expansion, Iran housing market,
Trend stationary, Unit root tests
Paper type Research paper

1. Introduction
The real estate sector has been the main driver of employment and economic growth in both
developing and developed countries (Ofori, 1990; Hongyu et al., 2002; Hong, 2014). In most
economies, residential real estate provides housing for families, and is the single largest
investment and the greatest source of wealth and savings for many families (Cocco, 2004).
The fluctuations of the sector affect economies in a wider context, from the fortunes of
corporations and households to the level of consumer spending, financial markets and
employment (Shen et al., 2005; Campbell and Coco, 2006). Hence, analyzing the degrees of
shocks persistence to house price attract attention in the academic studies, and the findings
hint the policymaking in the real estate sector (Ayuso and Restoy, 2007; Hadavandi et al.,
2011).
The persistence of shocks to house price are analyzed applying the univariate/panel unit
root/stationary tests in the housing literature (Canarella et al., 2012; Lean and Smyth, 2013;
Gil-Alana et al., 2014; Zhang et al., 2016; Gil-Alana et al., 2016). Determining whether a there International Journal of Housing
Markets and Analysis
Vol. 12 No. 5, 2019
pp. 849-864
© Emerald Publishing Limited
1753-8270
JEL classification – R21, R31, C22 DOI 10.1108/IJHMA-11-2018-0088
IJHMA is a unit root in the house prices has three important implications. First, from theoretical
12,5 point of view, the urban economic models suggest an equilibrium relationship between real
house price and real income, and this means that both of them are nonstationary or I(1). If
the null hypothesis of unit root is rejected in the house prices, then in the long run,
relationship between income and house prices will become a puzzle, and according to Zhang
et al. (2016), there should be a concern about the validity of equilibrium relationship between
850 real house price and real income. Also, if house prices behave as unit root process, the
shocks will have permanent effects on it. Thus, any positive shock increases house prices
permanently, which gradually alters the permanent income and consumption. In contrast, if
house prices are stationary, the shocks will have transitory effects on it, and thus do not
affect permanent income (Canarella et al., 2012). Second, from policymaking view, house
authorities should be aware that if house prices behave as unit root process, then the shocks
to the important variables may have prolonged effect, and will not disappear in the long run
in the case, the house market requires active housing policies. Third, from the investing
view, if house prices exhibit a stationary process, the investors are able to forecast the future
prices of house using its past information in the case, the market is inefficient. In contrast, if
house prices behave as random walk process, the investors are not capable of predicting the
future prices (Lean and Smyth, 2013).
The stochastic properties of house prices are associated to each other, depending on
advances in the econometrics of the unit root/stationarity tests. Stevenson (2004) tested the
unit root hypothesis for the house prices of five Irish cities and found no evidence for
stationarity. Cook (2005) examined the unit root hypothesis for the house prices of 13 UK
regions using ADF unit root test, and found that the unit root hypothesis was rejected for
none of them. Luo et al. (2007) tested the unit root hypothesis for eight Australian capital
cities applying ADF and PP tests, and found that non-stationarity cannot be rejected. Using
the smooth transition momentum-threshold autoregressive (ST-MTAR) unit root test, Cook
and Vougas (2009) found that the null hypothesis of unit root is rejected for aggregate house
prices in the United Kingdom. McMillan and Speight (2010) tested the unit root hypothesis
for house prices of 13 UK regions using ADF, PP, NP, and DF-GLS and found a few evidence
in favor of stationarity. Canarella et al. (2012) tested the stationarity properties of house
prices in 11 US metro areas, using various unit root tests that allowed for structural breaks
and nonlinearity. They found that the null hypothesis of unit root was rejected only for 1-3
out of 11 series. Lean and Smyth (2013) tested the trend stationary properties for 14 states in
Malaysia and found that majority of states’ housing prices follow a stationary process about
a segmented trend. Using various univariate and panel unit root tests, which allows for
structural breaks, Zhang et al. (2016) found evidence for the trend stationary of 120-year US
house prices, and its metro area and states. In contrast, Gil-Alana et al. (2016) found a high
persistence in the US house prices over the period from 1830 to 2013.
Surveys of empirical literature indicated that the scholars have identified two main
concerns in the house prices dynamics i.e. asymmetric behavior and structural breaks. As
noted by Abelson et al. (2005), shocks result in house prices deviation from long-run
equilibrium, but they adjust toward it asymmetrically because of downward price
stickiness. The logic behind the claim is that when house prices rise, buyers are keen to buy,
because further delay may result in them paying high prices. In contrast, when the house
prices are falling, sellers are unwilling to reduce prices. Furthermore, transaction times in
the house market relate inversely with real prices movements.
Another characteristic of house market is that the exogenous shocks, e.g. oil booms, may
affect the house prices, altering their long-run equilibrium. Various studies such as Cook and
Vougas (2009), Canarella et al. (2012), Lean and Smyth (2013) and Zhang et al. (2016) found
much evidence in favor of stationarity of house prices which allowed for structural breaks in House prices
the unit root tests[1]. stationary in
Surveys indicate that most of previous empirical research on stochastic properties of
house prices centered on house market of developed countries specially the US and the UK.
Iran
There are a few empirical studies which analyze the house prices dynamics in developing
countries, but they often deal with East Asian countries (Lean and Smyth, 2013), or South
Africa (Gil-Alana et al., 2013). This paper is to contribute for housing literature by two
aspects. First, it expands the literature on house price dynamics in developing countries, 851
studying the house price dynamics in Iran as an oil exporting country. Since the 1979
revolution, investment in the housing market has been a very important asset class for
Iranian households, and very beneficial for investors. Some reasons are: inflationary
environment of Iranian economy over about 50 years[2], low real interest rates under a
developing financial systems, the absence of effective property tax, international pressure
and economic sanctions in most years after 1979 revolution and limited access to
international financial markets (Nasseri, 2012; Gholipour and Lean, 2017; Gholipour and
Razali, 2017). Thus, prediction of house prices is very important for housing market agents
in Iran, which directly relates to the house prices being stochastic.
Second, this paper studies the oil price shocks which according to Khiabani (2015), have a
positive effect on housing activities, and thus, they explain about 28 per cent of the variation
in housing stocks and 21 per cent of the variation in real housing prices. Hence, we predict
that oil shocks may alter the house prices’ long-run equilibrium in Iran. To control for
structural breaks and asymmetric behavior of house prices, a novel unit root test, namely,
Fourier quantile unit root test, proposed by Bahmani-Oskooee et al. (2018),[3],[4] was
applied. Using the quantile regression, we can allow for different speed of adjustment at
various quantiles of house price distribution, and capture its asymmetric behavior without
specification of an assumption regarding the functional form of nonlinearities. As explained,
because of various shocks, house prices may experience breaks in some years, and thus,
perhaps they have outliers that using the quantile regression, we can control for non-
normality distribution and for the presence of such outliers. Finally, because of the low
frequency of house prices fluctuations in our study (semi-annual dataset), it is assumed that
using Fourier expansion, we can capture the number and form of breaks in the house prices.
The remainder of this paper is organized as follows. Section 2 describes Iran’s housing
market, and in Section 3, the methodology is presented. The empirical results are presented
in Section 4. Section 5 discusses the growth dynamics and Section 6 concludes the paper.

2. Iranian housing market

2.1 Aggregate house price dynamics
Iranian economy is oil-based. Since the Islamic revolution in 1979, so far, on average, about 19
per cent of GDP has been because of the value add of the oil sector (Central Bank of Iran). The
share of housing sector value added in the GDP during these years was an average of 9.6 per
cent. The major share of oil in the Iranian economy has had a huge impact on housing prices,
so that the rise in oil prices has led to higher housing prices (2007), and the fall in oil prices
has also caused positive price shock in the housing market (2016 and 2017)[5].
House is perhaps the most expensive asset that people purchase during their lifetime. By
comparing the average cost of housing and the average income of Iranians, one can say that
over the past 40 years, each Iranian household had to save their average total income of four
years to buy a 75 square meter house. On the other hand, mortgages in Iran account for a
small share of the total cost of housing (less than 30 per cent in recent years) for households.
As a result, land and housing in Iran has always been capital goods, and households have
IJHMA been investing in this sector to save or trade. This is revealed by comparing the consumer
12,5 price index and the housing price index in Iran.
As seen in Figure 1, in the long run, the housing price index in Iran has been moving
along with the consumer price index. According to this figure, the housing price in Iran has
always been increasing, getting around 200 times over the past 26 years. Although the price
of house index in Iran has grown by an average of 19 per cent annually, in these increases,
852 one can identify four huge growths, which have occurred during the years 1989, 2007, 2012
and 2017. The main reasons for these increases include the end of the war in 1988, liquidity
growth in 2007 because of rising oil prices[6], the first and the second rounds of international
sanctions against Iran’s economy in 2012 and 2017. These sanctions have contributed to
raising the exchange rate and housing prices in Iran.
But despite housing prices that have grown annually, the amount of housing
construction has been fluctuated during the past years. Figure 2 shows the per capita
surface area of the manufactured housing. The main reason for these fluctuations may be
the housing sector policies changes following the government shift. According to Iran’s
constitution, every citizen has the right to have a suitable shelter. So, the main approach of
governments in Iran has been helping people to buy or build houses. In this regard, paying
loans and allocating cheap or free land for constructing houses has been the priority of
governments’ plans.
These supports have been heavily dependent on oil prices. That is, by reducing oil
prices and therefore the governments income sources, governments’ support from

Figure 1.
Housing price index
and consumer price
index

2.5

1.5

0.5

Figure 2. 0
Per capita of housing
production (in square
meters)
Source: www.tsd.cbi.ir
housing sector has been reduced. On the contrary, with increasing oil revenues, House prices
governments have implemented ambitious plans in this sector. For example, from 2007 stationary in
to 2012, once oil price reached even more than $100 a barrel, the government Iran
implemented a massive populist plan to make low-cost housing for low-income
households, called “Mehr Housing Plan”, in which about 2 million residential units were
built and delivered to eligible households at less than the market prices. But the side-
effects of this plan can be highlighted by the sharp rise in liquidity. So that although the 853
average liquidity growth rate in the past 40 years was 21.8 per cent, during the years
after the project, it reached 27.6 per cent.
The housing market condition in Iran can be described in the following points: House
prices have risen steadily, housing construction has fluctuated sharply, governments have
tried to implement housing support plans, and housing prices, housing construction, and
government support plans have been depended on oil prices.

2.2 House-price dynamics in centers of Iran’s provinces

In this paper, the information on average residential house prices per square meter were
used as proxies for house price, as well as the collected semi-annual house prices in centers
of 20 Iran’s provinces over the period 1993-2017, whose the data are available. These cities
include Ahvaz (AHV), Arak (ARA), Ardabil (ARD), Isfahan (ISF), Gorgan (GOR), Hamadan
(HAM), Karaj (KAR), Kerman (KER), Kermanshah (KSH), Mashhad (MAS), Urmia (URM),
Qazvin (GHA), Qom (GHO), Rasht (RAS), Shiraz (SHI), Tabriz (TAB), Tehran (THE),
Zahedan (ZAH), Zanjan (ZAN) and Yazd (YAZ)[7]. The data have been taken from the
statistical center of Iran. It should be noted that the log-form of house price is used in this
analysis.
In Table I, the statistical data description is prepared. All statistics are calculated for the
period of 1993-2017. As seen, the mean of house prices varies from 1.6 (Yazd) to 6.9 (Tehran)
m rials. Over the period from 1993 to 2017, the highest house prices are related to cities i.e.
Tehran, Isfahan, Arak, Karaj and Tabriz, whereas the lowest prices are related to cities i.e.
Zahedan, Gorgan, Urmia, Ardabil, Hamadan, Mashhad and Qom.
Based on the standard deviation measure, cities i.e. Arak, Hamadan, Qom, Tehran and
Zanjan have experienced the most variation in the house price over the period, whereas the
other cities i.e. Yazd, Zahedan, Kerman, Rasht and Shiraz have had the most stable prices in
the residential house market. The p-values of Jarque–Bera normality tests in the last column
indicate that the null hypothesis of normal distribution is rejected for house prices in Ahvaz,
Ardabil, Hamadan, Kerman, Kermanshah and Yazd at 10 per cent significant level. The null
hypothesis of normal distribution is not rejected for other house prices series.

3. Methodology
As mentioned before, to test the stochastic properties of house prices, it used the quantile
unit root test, which allows for smooth breaks. Bahmani-Oskooee et al. (2017) developed a
quantile unit root test, which allowed for smooth breaks in the intercept, and applied it to
test the purchasing power parity theory in OECD countries. Furthermore, Bahmani-Oskooee
et al. (2018) developed a quantile unit root test, which allowed for smooth breaks in the trend
function. In this paper, Bahmani-Oskooee et al.’s (2018) Fourier quantile unit root test was
applied to examine the unit root hypothesis in the house prices.
A house price time series, HPt, with unknown break points in the trend function could be
represented by a Fourier expansion as follows:
IJHMA Maximum Minimum
12,5 Mean (million (million Iranian (million Iranian Jarque–
Cities Iranian rial) rial) rial) SD Skewness Kurtosis Bera P-value

Ahvaz 2.370 11.081 0.221 1.271 –0.482 1.736 5.264 0.072

Arak 2.484 17.998 0.173 1.546 –0.332 1.705 4.412 0.110
Ardabil 1.878 10.373 0.163 1.332 –0.321 1.662 4.588 0.101
854 Isfahan 3.306 21.290 0.261 1.370 –0.321 1.768 4.020 0.134
Gorgan 2.079 10.127 0.152 1.289 –0.466 1.966 4.035 0.133
Hamadan 2.268 13.671 0.168 1.461 –0.314 1.629 4.738 0.094
Karaj 3.039 17.275 0.252 1.300 –0.374 1.828 4.026 0.134
Kerman 1.728 7.879 0.195 1.200 –0.443 1.758 4.852 0.088
Kermanshah 1.977 11.059 0.177 1.365 –0.326 1.654 4.660 0.097
Mashhad 2.587 14.228 0.168 1.338 –0.459 1.923 4.171 0.124
Urmia 1.720 10.047 0.158 1.311 –0.258 1.636 4.431 0.109
Qazvin 3.022 15.367 0.256 1.289 –0.430 1.856 4.263 0.119
Qom 2.342 15.123 0.168 1.445 –0.277 1.720 4.055 0.132
Rasht 2.658 12.887 0.262 1.208 –0.348 1.760 4.215 0.122
Shiraz 2.873 16.482 0.290 1.262 –0.285 1.748 3.941 0.139
Tabriz 2.672 16.899 0.221 1.343 –0.278 1.769 3.801 0.149
Tehran 6.874 54.940 0.511 1.438 –0.227 1.783 3.516 0.172
Zahedan 1.739 7.158 0.151 1.187 –0.487 1.999 4.061 0.131
Zanjan 2.335 13.017 0.174 1.402 –0.408 1.788 4.452 0.108
Table I Yazd 1.569 6.361 0.193 1.177 –0.310 1.645 4.627 0.099
Data description of
house prices Source: Research findings



2p kt 2p kt
HPt ¼ u 1 þ u 2 t þ u F1 sin þ u F2 cos þ «t (1)
N N

Where N is the sample size, p = 3.1416, k is the optimum number of frequencies, t is the
trend term, u is the coefficients vector and « t is the error term. Following Becker et al. (2004),
there were applied ordinary least squares (OLS) to estimate the equation (1) and choose the
k* = k as the optimum frequency over range [0.1, 5], which minimizes the sum of squared
residuals when OLS is applied to equation (1).
To test the unit root hypothesis, Bahmani-Oskooee et al. (2018) recommended to
apply quantile regression on the augmented Dickey and Fuller (1979) model as
follows:

  X
p¼l
Q «^ t t j X t1 « t1 þ
¼ a0 ðt Þ þ r 1 ðt Þ^ « tp þ et
m 1þp ðt ÞD^ (2)
p¼1

 
Where «^ t is the OLS residuals of the equation (1), Q «^ t t j X t1 is t th quantile of «^ t
conditional on the past information set, Xt–1 . a0 ( t ) is t th conditional quantile of e t .
The optimum lags (p*) were selected by using the Akaike’s information criterion
(AIC). Following Bahmani-Oskooee et al. (2018), we estimated a0 ( t ), r 1 ( t ), and m 2
( t ), . . ., m kþ1 ( t ) by minimizing sum of asymmetrically weighted absolute
deviations:
 0 0 11
 House prices
X
n X
p* ¼l 
min @t  I @«^ t < a0 ðt Þ þ r 1 ðt Þ^
« t1 þ « tp* AA«^ t  a0 ðt Þ
m 1þp* ðt ÞD^ stationary in
t¼1 p* ¼1
Iran

X
p ¼l*

« t1 þ
þ r 1 ðt Þ^ « tp* 
m 1þp ðt ÞD^
p* ¼1

(3) 855


Xp¼l
Where I = 1 if «^ t < « t1 þ
a0 ðt Þ þ r 1 ðt Þ^ p* ¼1
m 1þp* ðt ÞD^
« tp* and I = 0, otherwise.
To test a unit root of «^ t within the t th quantile, Bahmani-Oskooee et al. (2018) suggested the
following t ratio statistic:
 
^f F1 ðt i Þ  1=2 
0 
tn ðt i Þ ¼ pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi B1 PD B1 r^1 ðt i Þ  1 (4)
t i ð1  t i Þ

In the following equation, B1 is the vector of the lagged dependent variable (^ « t1 Þ, and PD
is the projection matrix onto the  space orthogonal to D ¼ ð1; D^
« t1 ; . . . ; D^
« tp Þ. To
obtain a consistent estimator of ^f F ðt i Þ , Koenker and Xiao (2004) propose:
1

 
^f F1 ðt i Þ ¼ ðt i  t i1 Þ

0  (5)
D c ðt i Þ  c ðt i1 Þ
h i
Where c (t i) = (a0(t i), r (t i), m 2(t i ),. . ., m 1þp*(t i)) and t i 2 j; j In this paper, we set
j ¼ 0:1 and j ¼ 0:9 Bahmani-Oskooee et al. (2018) propose the quantile Kolmogorov–
Smirnov (QKS) test by the following equation, to test the unit root hypothesis over a range of
quantiles:

FQKS ¼ sup t 2
j;j  jtn ðt Þj (6)
i

The limiting distributions of tn(t i) and QKS test statistics are nonstandard, and depend on
nuisance parameters. So, Bahmani-Oskooee et al. (2018) re-sampling procedures are used to
drive the exact critical values.

4. Empirical results
First, we tested the null hypothesis of a unit root in the house prices, using four linear ordinary/
generalized least squares (O/GLS) unit root tests, i.e. augmented Dickey and Fuller (1979) (ADF),
Elliott et al. (1996) (DF-GLS), Phillips and Perron (1988) (PP) and Ng and Perron (2001) (Ng–
Perron) and Kwiatkowski et al. (1992) (KPSS) stationary test, and allowed for the trend terms in
all of them. The results are provided in Table II. As seen, the unit root hypotheses are not rejected
for all house prices series. According to NP unit root test, the null hypothesis is rejected only for
house prices of Zanjan. The finding, using conventional unit root/stationary tests, may be related
to their low power when the time span is short and/or when the house prices series are highly
persistent and/or when the house prices series experience shifts in some dates.
IJHMA Unit root tests Half-life
12,5 Provinces ADF DF-GLS PP NP KPSS –95% Half- life þ95%

Ahvaz –0.576 –1.527 –0.931 –2.019 0.213 30.000 19.722 30.000

Arak 0.734 –1.300 –0.843 –3.387 0.213 30.000 28.184 30.000
Ardabil –1.532 –1.353 –1.058 –2.913 0.193 28.202 14.792 30.000
Isfahan 0.337 –1.780 –1.265 –3.302 0.211 30.000 30.000 30.000
856 Gorgan –0.181 –0.817 –1.342 –1.795 0.226 30.000 23.410 30.000
Hamadan –1.006 –1.614 –1.447 –5.004 0.177 22.595 8.003 30.000
Karaj 0.405 –1.077 –1.314 –2.549 0.202 30.000 30.000 30.000
Kerman –1.303 –1.268 –1.401 –4.338 0.206 22.894 13.114 30.000
Kermanshah –0.565 –1.555 –0.936 –3.261 0.201 30.000 18.160 30.000
Mashhad 0.332 –0.576 –1.503 –1.809 0.221 30.000 30.000 30.000
Urmia –0.523 –1.693 –0.883 –2.350 0.190 30.000 20.394 30.000
Qazvin –0.563 –1.005 –1.217 –2.734 0.213 30.000 18.423 30.000
Qom 0.633 –0.927 –1.604 –5.956 0.177 30.000 16.413 30.000
Rasht 0.153 –1.584 –1.715 –4.657 0.204 23.755 14.045 30.000
Shiraz 2.489 –2.563 –1.954 –8.023 0.182 30.000 16.626 30.000
Tabriz 0.402 –1.830 –1.522 –4.361 0.197 30.000 16.992 30.000
Tehran 0.491 –0.861 –2.087 –8.113 0.155 30.000 28.894 30.000
Zahedan 1.823 –1.139 –4.784 –19.822** 0.168 18.218 11.575 30.000
Zanjan 0.775 –1.080 –1.073 –3.084 0.214 25.792 14.831 30.000
Yazd 0.372 –1.089 –0.832 –3.058 0.194 30.000 17.247 30.000
Table II.
Notes: We determine optimum lag(s) for ADF, DF-GLS, PP, NG, KSS and Sollis (2009) unit root tests based
Linear O/GLS based on the AIC information criteria. In the NG and PP tests, the bandwidth was selected by the Bartlett Kernel.
unit root test and **denotes the null hypothesis of unit root is rejected at 5%
half-life Source: Research findings

As a further work, we measured the persistence degree of house prices through the half-life[8].
To the end, following Rapach and Wohar (2004), we suppose that house prices series (HPt) are
generated as the autoregression (AR(L)) model:
X
l¼L
HPt ¼ g þ d l HPt þ #t (7)
l¼1

Where the half-life is calculated by using cumulative impulse response function. To

Xl¼L
construct the 95 per cent confidence intervals for the sum of the AR coefficients ( l¼L d l Þ,
Rapach and Wohar (2004) propose Hansen (1999) methodology. Table II provides the results
for the half-life. The half-life is between 4 (Hamadan) and 15 years (Isfahan, Karaj and
Mashhad). Results of confidence intervals for half-life shows that the confidence intervals
are very wide for the half-life of all cities, and there is a high degree of persistence in the
house prices series.
To test the low power of linear unit root/stationary tests, we examined the house prices
stationarity using Fourier quantile unit root test. To the end, first, we estimated the equation (1)
using OLS estimator, whose results are prepared in the Table III. Using a grid-search, we found
the optimum frequency to be 1 (k* = 1) for house prices of Ardabil, Hamadan, Kermanshah and
Urmia. The integer value of k* indicate that shocks to trend function of the above-mentioned
house price have transitory effects, and thus, do not result in permanent shifts in the intercept
or slope of trend function. For other house prices, we found fractional optimum frequencies,
which indicate that shocks have had permanent effects on components of trend function. We
 Restricted Coefficients t-statistic
House prices
Province K *
F statistic u^ 1 u^ 2 u^ F1 u^ F2 u^ 1 u^ 2 u^ F1 u^ F2 stationary in
Iran
Ahvaz 1.2 120.606 5.760 0.081 –0.362 –0.225 130.33 52.78 –11.650 –7.53
Arak 0.8 92.062 5.502 0.087 –0.078 –0.507 60.83 25.20 –1.380 –11.60
Ardabil 1 55.313 5.487 0.080 –0.257 –0.254 88.28 34.99 –5.480 –8.63
Isfahan 0.6 64.137 6.054 0.072 0.273 –0.534 36.83 11.26 4.83 –4.68
Gorgan 0.1 95.327 –2.623 –0.241 30.255 7.544 –0.36 –0.85 1.40 1.04 857
Hamadan 1 36.247 5.511 0.087 –0.303 –0.279 63.74 27.19 –4.66 –6.83
Karaj 0.5 39.784 6.040 0.061 0.629 –0.552 17.74 4.66 8.42 –2.05
Kerman 1.1 58.495 5.577 0.075 –0.266 –0.299 84.54 31.63 5.45 –7.81
Kermanshah 1 67.093 5.474 0.083 –0.251 –0.268 94.00 38.53 5.71 –9.71
Mashhad 0.1 74.871 2.504 –0.440 45.734 2.585 0.30 –1.35 1.84 0.31
Urmia 1 80.033 5.401 0.080 –0.235 –0.192 129.53 52.14 –7.47 –9.74
Qazvin 0.6 62.733 5.961 0.069 0.419 –0.504 28.61 8.59 5.85 –3.48
Qom 0.1 30.806 29.120 –1.312 111.400 –24.009 2.76 –3.21 3.57 –2.29
Rasht 0.7 46.05 6.074 0.066 0.097 0.454 44.24 12.43 1.42 –5.64
Shiraz 0.8 23.076 5.973 0.076 –0.018 0.319 50.40 16.68 –0.25 –5.57
Tabriz 0.1 44.032 17.387 0.779 69.650 –12.021 2.41 –2.79 3.27 –1.68
Tehran 4.4 37.383 6.362 0.098 –0.227 –0.040 164.87 74.19 –8.52 –1.48
Zahedan 0.1 68.095 7.403 –0.023 12.777 12.317 0.91 –0.07 0.53 1.52
Zanjan 0.8 65.674 5.591 0.081 0.011 –0.488 50.10 18.98 0.16 –9.05
Yazd 0.6 72.852 6.179 0.038 0.137 –0.902 35.84 5.63 2.31 –7.53

Notes: k* is optimum frequency. The critical values of restricted F statistics are computed using Monte Table III.
Carlo simulation but to save the space are not reported and are prepared upon request OLS estimation
Source: Research findings results of equation (1)

found that the fractional optimum k* is greater than 1 for house prices in Ahvaz (1.2), Kerman
(1.1) and Tehran (4.4); whereas, it equals 0.1 for Gorgan, Mashhad, Qom, Tabriz and Zahedan.
In addition, it equals 0.5 for Karaj, and equals 0.6 for Isfahan, Qazvin and Yazd. Furthermore, it
equals 0.7 for Rasht, and equals 0.8 for Arak, Shiraz and Zanjan. The results of restricted F
statistics (as well as t-statistic of coefficients of equation (1))[9] indicate that both sine and
cosine terms should be included in the model for all house prices series. Dynamics of house
prices series and the estimated Fourier expansion in Figure 3 clearly indicate that the actual
nature of break(s) [number and form of break(s)] is generally unknown.
As mentioned in Section 4, by using the OLS residuals from the equation (1) and quantile
regression framework, we estimated the equation (2) for all house prices series. Table IV
presents the results. To decide the unit root properties in each quantile, we used the P-values
of tn(t i ) statistics, prepared in the panel A of Table IV. Results indicate that:
 House prices of three cities i.e. Ahvaz, Gorgan and Zahedan have a stationary
behavior over all quantiles.
 House prices of two cities i.e. Arak and Urmia have a unit root behavior only in
quantiles 0.1 and 0.2, whereas over other quantiles, show stationary properties.
 House prices series of Ardabil, Isfahan, Karaj, Kerman, Kermanshah, Mashhad,
Qazvin, Qom, Rasht, Shiraz, Tabriz, Zanjan and Yazd display unit root properties
over high quantiles specially quantiles 0.8 and 0.9, whereas over middle and low
quantiles, exhibit stationary properties.
 Only for one city, Tehran, the null hypothesis of unit root is not rejected over all
quantiles.
IJHMA
12,5

858

Figure 3.
Dynamics of house
prices of Iranian’s
provinces capital Notes: Dotted line are the house prices series and solid lines are estimated Fourier expansions.
cities and fitted The abbreviations are described in section 2
Fourier expansion
Source: Research findings

Panel B: Fourier quantile

Panel A: P-value of tn(t i ) statistics unit root test
Province 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 FQKS 0.9 0.95 0.99

Ahvaz 0.015 0.041 0.019 0.006 0.005 0.000 0.001 0.016 0.026 6.644 4.62 5.68 9.26
Arak 0.224 0.202 0.002 0.001 0.000 0.001 0.005 0.009 0.042 4.829 4.44 5.44 8.74
Ardabil 0.034 0.005 0.009 0.007 0.009 0.005 0.006 0.132 0.400 4.745 4.21 5.04 7.45
Isfahan 0.067 0.170 0.012 0.019 0.109 0.018 0.021 0.034 0.102 2.998 3.2 3.75 4.82
Gorgan 0.043 0.006 0.086 0.035 0.004 0.003 0.009 0.044 0.082 3.976 3.96 4.8 6.92
Hamadan 0.348 0.164 0.114 0.018 0.014 0.009 0.010 0.241 0.362 3.011 4.22 5.2 8.47
Karaj 0.005 0.011 0.016 0.022 0.072 0.119 0.024 0.115 0.206 8.292 4.64 5.47 8.32
Kerman 0.005 0.003 0.001 0.001 0.001 0.001 0.003 0.059 0.207 7.521 4.34 5.25 7.86
Kermanshah 0.025 0.007 0.002 0.006 0.004 0.002 0.023 0.021 0.224 4.657 3.93 4.84 7.18
Mashhad 0.052 0.002 0.000 0.002 0.000 0.016 0.120 0.086 0.402 5.028 4.55 5.61 8.52
Urmia 0.353 0.085 0.040 0.011 0.006 0.019 0.018 0.024 0.050 4.53 4.63 5.72 8.94
Qazvin 0.003 0.000 0.002 0.004 0.019 0.007 0.023 0.005 0.273 7.175 3.86 4.7 6.92
Qom 0.020 0.003 0.016 0.022 0.025 0.017 0.090 0.014 0.368 5.056 3.96 4.69 6.62
Rasht 0.057 0.123 0.045 0.005 0.009 0.013 0.016 0.113 0.727 3.583 4.31 5.29 7.5
Shiraz 0.004 0.004 0.021 0.002 0.007 0.007 0.010 0.059 0.305 7.098 3.81 4.62 6.5
Tabriz 0.015 0.036 0.018 0.018 0.035 0.003 0.008 0.051 0.317 6.14 4.55 5.64 8.74
Tehran 0.141 0.109 0.219 0.563 0.534 0.631 0.721 0.367 0.746 1.647 3.22 3.59 4.5
Zahedan 0.099 0.009 0.001 0.000 0.000 0.000 0.000 0.000 0.001 12.54 3.95 4.76 7
Zanjan 0.004 0.004 0.000 0.004 0.037 0.004 0.016 0.125 0.168 8.453 4.14 4.84 7.38
Yazd 0.071 0.021 0.001 0.003 0.007 0.027 0.114 0.340 0.200 4.463 3.95 4.72 6.62
Table IV. Note: We compute the critical values of tn(t i ) and FQKS statistics using bootstrapping procedure and 5000
Fourier quantile unit replications
root test results Source: Research findings
To analyze the degree of shocks persistence to house prices in each quantile, we graphed the House prices
values of a ^ 0 ðt Þ and r^ 1 ðt Þ over quantiles t [ (0.1,0.9), which are displayed in Figure 4. stationary in
^ 0 ðt Þis the t th conditional quantile of et, and its estimated value captures the magnitude of
a
house price shock in each quantile. The values of r^ 1 ðt Þ indicate the degree of shocks
Iran
persistence to house prices.
Dynamics of a ^ 0 ðt Þ over quantiles t [ (0.1,0.9) in Figure 4 show a relatively upward
straight-line pattern for all house prices. Almost for all cases, the magnitudes of a ^ 0 ðt Þ is
negative for t [ (0.1,0.4), is positive for t [ (0.6,0.9), and is equal to zero for t = 0.5. 859
Dynamics of r^ 1 ðt Þ over quantiles t [ (0.1,0.9) in Figure 4 exhibits three types of
patterns:
 For Yazd, Tehran and Qom, the r ^ 1 ðt Þ displays a straight-line or a concave upward
pattern. In these cities, the negative shocks to house prices disappear in the short-
run, whereas positive shocks to house prices have long-run effects.
 For Ahvaz, Arak, Isfahan, Gorgan, Hamadan, Kerman, Kermanshah, Urmia,
Qazvin, Rasht, Shiraz, Tabriz, Zahedan and Zanjan, the r^ 1 ðt Þ shows a straight-line
or a concave downward pattern. In these cities, the negative shocks to house prices

Figure 4.
Dynamics of quantile
intercepts (a0 (t )) and
Note: Solid line is the magnitude of ρ1 (τ) and dashed lines are bootstrap 95% confidence autoregressive
intervals coefficients ( r 1 (t ))
over t [ (0.1,0.9)
Source: Research findings
IJHMA have permanent effects, whereas positive shocks to house prices have transitory
12,5 effects. For most the cities in the group, the persistent degrees in the quantiles 0.8
and 0.9 are higher than the quantiles 0.6 and 0.7, which indicates that if magnitude
of positive shocks is very high, the shocks may need more times to disappear.
 For Mashhad, Karaj and Ardabil, the degree of persistence is almost fixed in
quantiles 0.1 to 0.7, and increases only over quantiles 0.8 and 0.9.
860
To examine the unit root behavior of the house prices series in the quantiles t i [ (0.1,0.9) , we
compared the FQKS test statistics to its bootstrap critical values at 10 per cent, 5 per cent
and 1 per cent level of significance. Results indicate that the null hypothesis of unit root is
rejected for 5 out of 20 house prices of Isfahan, Hamadan, Urmia, Rasht and Tehran. For 4
out of 20 series of Qazvin, Shiraz, Zahedan and Zanjan, the null hypothesis is rejected at the
1 per cent level. For 5 out of 20 series of Ahvaz, Karaj, Kerman, Qom and Tabriz, the null
hypothesis of unit root is rejected at the 5 per cent level; whereas for 6 out of 20 house price
series of Arak, Ardabil, Gorgan, Kermanshah, Mashhad and Yazd, the null hypothesis of
unit root is rejected at the 5 per cent level.
As seen, by applying the Fourier quantile unit root test and controlling for structural
breaks in the autoregressive coefficients and smooth breaks in the trend function, we found
more evidence for the stationary behavior of house prices than using the conventional unit
root/stationary tests.

5. Conclusion
In this paper, there were studied the stochastic properties of 20 house prices of Iran’s
provinces centers using unit root/stationary tests. When applying the O/GLS base unit root
tests, we found no stationary properties for house prices. But when applying a novel Fourier
quantile unit root test, the null hypothesis of unit root was rejected for 15 out of 20 series.
The cities for which the null hypothesis of unit root is not rejected are Isfahan, Hamadan,
Urmia, Rasht and Tehran. There are some explanations for why house prices of the cities
behave as unit root process. One explanation could be that the house prices’ volatility,
especially in Isfahan, Hamadan and Tehran, is high (even greater than the average). As
described by Narayan et al. (2008) and Lean and Smyth (2013), in the cities with high volatile
house prices, any exogenous shock to house price results in deviation from the trend growth,
creates volatility and creates more persistent effects. According to the results, positive oil
price shocks may transmit to housing market of the cities, especially Tehran, and have long-
run effects. Conceptually, another explanation is that exogenous shocks to provinces/cities
with under developed housing markets will have long-run effect. The random walk behavior
of house prices of Urmia may consist with this conjecture[10].
Other results indicate that the house price series make different responses to positive and
negative shocks. In some of cities (Yazd, Tehran and Qom), the positive shocks have long-
run effects, whereas in Ahvaz, Arak, Isfahan, Gorgan, Hamadan, Kerman, Kermanshah,
Urmia, Qazvin, Rasht, Shiraz, Tabriz, Zahedan and Zanjan, the negative shocks to house
price have a prolonged impact.
The results could assist the policymakers in housing markets as well as real estate
agents. Based on our results, house prices in cities make asymmetric responses to positive
and negative shocks. Hence, it is important for policymakers to distinguish between the
positive and negative shocks. Moreover, if the real estate agents and investors have a priori
knowledge about the nature and persistence degree of exogenous shocks to housing prices,
they can benefit from the positive effects, or avoid being victimized by the negative effects.
Gholipour and Lean (2017) showed that house price inflation is a local and provincial and do
not ripple out across the country quickly. Our results showed that any positive or negative House prices
shocks have prolonged effects. Therefore, one can expect that the exogenous shocks have stationary in
prolonged but local effect on housing prices. Therefore, policymakers may consider the
housing market in each province individually and pay attention to province’s economic
Iran
situation. To protect investors and households against exogenous shocks, policymakers
may facilitate the construction of new residential.
Iran as an oil exporting country, has been encountered to oil prices fluctuations in past
few years that along with international sanctions led to sharp decline in country’s oil 861
revenues. As the public budget is highly dependent on oil inflows (50 per cent in average in
past decade, Central Bank of Iran), the government encountered serious financing problems.
Because of central bank dependency, financial issues of government have led to an increase
in the high-powered money. Also the authority of military institutions raised over the past
decade and each has its own credit institute whose activities are not fully controlled by the
central bank. As a result, liquidity annual growth lead to about 20 per cent (Central Bank of
Iran). As interest rates sets administratively, the central bank couldn’t set interest rate as a
monetary policy and as the sanctions become more intense, the expectations of private
sector worst, which led to amplification in demand of all markets including housing market
and regard to the inelastic nature of house supply, the prices will rise rapidly. As Khiabani
(2015) mentioned, historically, the trend of price of housing and money supply are
correlated. Therefore, one can expect that future money supply shock may lead to – as a
result of this paper – permanent house price shock.
So as long as sanctions exists, there will be exogenous shocks on housing market that
bias the prices from its fundamental values. In this regard, as a long term aim, it seems that
Iran political authorities shall try to amend international relations. In short term,
policymakers may focus on two monetary shocks, liquidity and high-powered money. As
pointed out earlier, interest rate isn’t available as a monetary policy so the central bank can
try to restrict the high-powered money. This will be achieved through the independence of
monetary authority and applying the contractionary monetary policies. To limit the volume
of liquidity that created by semi-official military-based credit institutes, empowering the
central bank and the rule of law seems to be a fair suggestion.

Notes
1. As noted by Perron (1989), structural shifts reduce the power of conventional unit root tests.
2. Iranian economy has experienced two digits’ inflation rates in most years after the 1979
revolution.
3. Our investigations indicated that allowing for structural breaks or nonlinearity in the unit root
tests, researchers found much evidence for the stationarity of house prices. Yet, on our best
knowledge, they all investigated the structural breaks and the nonlinearity, separately; while
house prices may behave asymmetrically, and be affected by the exogenous shocks.
4. Gholipour and Lean (2017) tested the ripple effect in the Iranian housing market. To the end, they
applied Lee and Strazicich (2004) unit root test. The first difference between our study with
Gholipour and Lean (2017) is related to capture the structural breaks in the house prices. They
considered sharp breaks and captured it using a dummy variable. While in our study, using
Fourier expansion, we do not assume that the number or the dates of breaks are known a priori.
Also using fractional frequencies allow for control a break occurring near the beginning or end of
the data while using dummy variables in the unit root test, we could not capture this type of
dynamics. The second difference is related to the estimation methodology. Gholipour and Lean
(2017) used the OLS estimator to estimate the model in the Lee and Strazicich (2004) unit root test
IJHMA while we apply the quantile regression. Using the quantile regression, we can allow for the
different speed of adjustment at various quantiles of house price distribution, and capture its
12,5 asymmetric behavior without specification of an assumption regarding the functional form of
nonlinearities. As explained, due to various shocks, house prices may experience breaks in some
years, and thus, perhaps they have outliers that using the quantile regression, we can control for
non-normality distribution and for the presence of such outliers (page 4 of our paper).

862 5. To study about the impact of oil prices on housing market, please see Khiabani (2015).
6. Most of this liquidity flooded the housing market, and sharply increased the price in this market.
7. For more information about Iran’s political map, its international boundary, and provincial
boundaries, see Gholipour and Lean (2017, p. 4).
8. Half-life refers to the number of years required for a shock to inflation rates series to be reduced
to half.
9. To save the space, the critical values of restricted F statistics are not reported here.
10. Urmia is the center of West Azerbaijan. The share of real estate sector from the provinces’ GDP is
about 10 per cent which is less than average country.

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Bierens, H.J. (1997), “Testing the unit root with drift hypothesis against nonlinear trend stationarity,
with an application to the US price level and interest rate”, Journal of Econometrics, Vol. 81 No. 1,
pp. 29-65.
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Statistical center of Iran, available at: www.amar.org.ir.

Corresponding author
Arash Hadizadeh can be contacted at: hadizadeh@qiau.ac.ir

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