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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)

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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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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
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Handle: RePEc:pre:wpaper:200922

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

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Find related papers by JEL classification:
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
D40 - Microeconomics - - Market Structure and Pricing - - - General
L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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    Other versions:
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    Other versions:
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  11. Caner, M. & Kilian, L., 2001. "Size distortions of tests of the null hypothesis of stationarity: evidence and implications for the PPP debate," Journal of International Money and Finance, Elsevier, vol. 20(5), pages 639-657, October. [Downloadable!] (restricted)
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  12. Papell, David H., 1997. "Searching for stationarity: Purchasing power parity under the current float," Journal of International Economics, Elsevier, vol. 43(3-4), pages 313-332, November. [Downloadable!] (restricted)
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