The Impact of House Prices on Consumption in South Africa: Evidence from Provincial-Level Panel VARs

Abstract

This paper provides an empirical analysis of the role of house prices in determining the dynamic behaviour of consumption in South Africa using a panel vector autoregression (PVAR) approach to provincial level panel data covering the period of 1996 to 2010. With the shocks being identified using the standard recursive identification scheme, we find that the response of consumption to house prices shock is positive, but short-lived. In addition, we find that a positive shock to house price growth has a positive and significant effect on consumption, while the negative impact of an anticipated house price decrease causes an insignificant reduction in consumption. This suggests that house prices exhibit an asymmetric effect on consumption, with the positive effect following an increase in house prices being dominant in magnitude in comparison to a decline in consumption resulting from a negative shock to house prices.

The causal relationship between house prices and growth in the nine provinces of South Africa: evidence from panel - Granger causality tests

“…Miller et al, (2011) applied a Common Correlation Error (CCE) model on metropolitan data and found that house price changes in the US affect significantly per capita GDP growth. Using panel time series methodology, similar result was found by Simo-Kengne et al, (2012), who reported a significant positive effect of house price appreciation on economic growth at both national and provincial levels in South Africa. While these studies implicitly support a housing-led growth hypothesis, they both rely on a single-equation model which could not capture the dynamics of the referred variables.…”

“…However, being at the national level, the papers by Demary (2010) and Nyakabawo et al, (2013) fails to account for heterogeneity in the geographical distribution of housing wealth, spatial effects as well as different prevailing economic conditions across regions which are possibly non-aligned with national conditions. Considering significant disparities in the socio-economic conditions across regions, the aim of this paper is therefore to investigate the causal relationship between housing activity and economic growth in nine provinces of South Africa over the period of 1995-2011, and hence, complement the analysis of Simo-Kengne et al, (2012), which assume the housing-led growth hypothesis at provincial-level for South Africa. Besides the fact that house price and output dynamics are local phenomena, housing represents 29.40% of households' assets and 21.68% of total wealth in South Africa (Das et al, 2011).…”

“…Few exceptions that we are aware of include: Leung (2003), Demary (2010), Miller et al, (2011), Simo-Kengne et al, (2012 and Nyakabawo et al, (2013). Leung (2003) developed a simple endogenous growth model to show that economic growth can induce the real house price growth; but this theoretical result need to be assessed empirically.…”

Temporal causality between house prices and output in the US: A bootstrap rolling-window approach

“…Policies that bring about stability in the real house price will probably help to stabilize real GDP per capita. Furthermore, policies that depress the housing market will probably depress output while policies that stimulate the housing market will probably stimulate output (Chui and Chau, 2005;and Simo-Kengne et al, 2012).…”

Housing and the business cycle in South Africa

“…2 Though, there exist quite a number of studies that have looked at the spillover of real house prices on consumption in both constant and time-varying parameter models. See for instance: Aron et al, (2006), Das et al, (2011), Ncube andNdou (2011), Peretti et al, (2012), Simo-Kengne et al, (forthcoming), and Aye et al, (forthcoming a) .3 panel data regressions (Simo-Kengne et al, 2012), and panel-Granger causality between real house prices and per capita economic growth at the provincial level (Chang et al, 2013) based on annual data. 4 However, to the best of our knowledge, we are not aware of any analyses that have simultaneously looked at all three of the above-mentioned housing variables and the business cycle in South Africa using a time-varying approach.…”