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Convergence of Metropolitan House Prices in South Africa: A Re-Examination Using Efficient Unit Root Tests

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Author Info

  • Sonali Das

    ()
    (LQM, CSIR, Pretoria)

  • Rangan Gupta

    ()
    (Department of Economics, University of Pretoria)

  • Patrick Agu Kaya

    ()
    (Department of Economics, University of Pretoria)

Abstract

This paper analyzes whether the Law of One Price (LOOP) holds in the housing market of five metropolitan areas of South Africa, namely Cape Town, Durban, Greater Johannesburg, Port Elizabeth/Uitenhage and Pretoria. We test the existence of LOOP using the efficient unit root tests proposed by Elliott et al. (1996) [DF-GLS] and Elliott (1999) [DF-GLSu] based on monthly data on residential property prices covering the period of 1967:01 to 2009:03 for the large-, medium and small-middle segments of the housing market. Based on the DF-GLSu test, we find overwhelming evidence of the existence of LOOP in twelve of the fifteen possible cases, especially as the sample period becomes more recent. More importantly, our results are in sharp contrast with those obtained by Burger and Van Rensburg (2008) using quarterly data based on the Im, Pesharan and Shin (IPS, 2003) test, which are, in turn, shown to be highly sensitive to frequency of the data and temporal aggregation. With the rejection or the non-rejection of the null hypothesis of unit roots, based on panel data tests, not providing sufficient evidence to conclude that all the series in the panels have a unit root or that they are all stationary, more reliability should be placed on our results obtained from the efficient unit root tests.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200922.

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Length: 15 pages
Date of creation: Oct 2009
Date of revision:
Handle: RePEc:pre:wpaper:200922

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Keywords: Efficient Unit Root Tests; House Prices; Law of One Price; Price Convergence; Single Market;

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References

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  1. Motta,Massimo, 2004. "Competition Policy," Cambridge Books, Cambridge University Press, number 9780521016919, April.
  2. Karlsson, Sune & Lothgren, Mickael, 2000. "On the power and interpretation of panel unit root tests," Economics Letters, Elsevier, vol. 66(3), pages 249-255, March.
  3. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
  4. Kilian, L. & Caner, M., 1999. "Size Distortions of Tests of the Null Hypothesis of Stationarity: Evidence and Implications for the PPP Debate," Papers 99-05, Michigan - Center for Research on Economic & Social Theory.
  5. Axel Dreher & Tim Krieger, 2004. "Do gasoline prices converge in a unified Europe with non- harmonized tax rates?," International Finance 0411005, EconWPA.
  6. Francis W. Ahking, 2002. "Efficient Unit Root Tests of real Exchange Rates in the Post-Bretton Woods Era," Working papers 2002-17, University of Connecticut, Department of Economics.
  7. Smith, Lawrence B & Rosen, Kenneth T & Fallis, George, 1988. "Recent Developments in Economic Models of Housing Markets," Journal of Economic Literature, American Economic Association, vol. 26(1), pages 29-64, March.
  8. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
  9. Mario Forni, 2004. "Using Stationarity Tests in Antitrust Market Definition," American Law and Economics Review, Oxford University Press, vol. 6(2), pages 441-464.
  10. Philippe Burger & Lizelle janse Van rensburg, 2008. "Metropolitan House Prices In South Africa: Do They Converge?," South African Journal of Economics, Economic Society of South Africa, vol. 76(2), pages 291-297, 06.
  11. Graham Elliott & Thomas J. Rothenberg & James H. Stock, 1992. "Efficient Tests for an Autoregressive Unit Root," NBER Technical Working Papers 0130, National Bureau of Economic Research, Inc.
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Cited by:
  1. Roula Inglesi-Lotz & Rangan Gupta, 2011. "Relationship between House Prices and Inflation in South Africa: An ARDL Approach," Working Papers 201130, University of Pretoria, Department of Economics.
  2. Goodness C. Aye & Samrat Goswami & Rangan Gupta, 2012. "Metropolitan House Prices In India: Do They Converge?," Working Papers 201220, University of Pretoria, Department of Economics.
  3. Luis A. Gil-Alana & Goodness C. Aye & Rangan Gupta, 2012. "Testing for Persistence with Breaks and Outliers in South African House Prices," Faculty Working Papers 20/12, School of Economics and Business Administration, University of Navarra.
  4. Beatrice D. Simo-Kengne & Manoel Bittencourt & Rangan Gupta, 2011. "House Prices and Economic Growth in South Africa: Evidence from Provincial-Level Data," Working Papers 201116, University of Pretoria, Department of Economics.

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