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Bubbles in South African House Prices and their Impact on Consumption

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Author Info

  • Sonali Das

    ()
    (LQM, CSIR, Pretoria)

  • Rangan Gupta

    ()
    (Department of Economics, University of Pretoria)

  • Patrick T Kanda

    ()
    (Department of Economics, University of Pretoria)

Abstract

This paper tests for house price bubbles in the South African housing market, using quarterly data from 1969:Q2 to 2009:Q3, based on the unit root test developed by Phillips et al. 2010. This test allows us to detect whether a bubble exists or not, as well as the date of emergence and collapse of the same. Our findings show evidence of house price bubbles in the large, medium and small-middle segments, as well as, the aggregate middle-segment of the South African housing market. There is however, no evidence of bubbles in the luxury and affordable segments of the market. Next we estimate an Error Correction Model (ECM) to investigate the existence of spillover effects from the housing sector onto consumption. Results indicate significant spillovers, though there is no evidence of the effect being higher during the bubble period. Finally, we disentangle the effects of the house price acceleration and deceleration on consumption in an effort to investigate whether or not consumption reacts asymmetrically to movements in house prices. We find that consumption responds significantly to the house price deceleration but not to acceleration, with this effect also not showing any evidence of being higher during the identified bubble period. The fact that we do not observe consumption to be more responsive to house price acceleration (deceleration) during the bubble period is most likely due two reasons: First, the National Credit Act number 34 implemented in 2005, which enforced responsible granting and use of credit and prohibited reckless awarding of credits (NCA, 2006) and second, the findings of recent studies depicting evidence of pronounced discretionary changes by the South African Reserve Bank to counter the recent adverse movements in the financial markets.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201017.

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Length: 20 pages
Date of creation: Jul 2010
Date of revision:
Handle: RePEc:pre:wpaper:201017

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Keywords: House price; bubble; consumption;

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Cited by:
  1. Aye, Goodness C. & Balcilar, Mehmet & Bosch, Adél & Gupta, Rangan, 2014. "Housing and the business cycle in South Africa," Journal of Policy Modeling, Elsevier, vol. 36(3), pages 471-491.
  2. Alexander Zimper, 2013. "The minimal confidence levels of Basel capital regulation," Working Papers 201305, University of Pretoria, Department of Economics.
  3. Goodness C. Aye & Mehmet Balcilar & Rangan Gupta & Charl Jooste & Stephen M. Miller & Zeynel A. Ozdemir, 2012. "Fiscal Policy Shocks and the Dynamics of Asset Prices: The South African Experience," Working Papers 201228, University of Pretoria, Department of Economics.
  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.
  5. Goodness C. Aye & Rangan Gupta & Alain Kaninda & Wendy Nyakabawo & Aarifah Razak, 2013. "House Price, Stock Price and Consumption in South Africa: A Structural VAR Approach," Working Papers 201309, University of Pretoria, Department of Economics.
  6. Beatrice D. Simo - Kengne & Mehmet Balcilar & Rangan Gupta & Monique Reid & Goodness C. Aye, 2012. "Is the relationship between monetary policy and house prices asymmetric in South Africa? Evidence from a Markov-Switching Vector Autoregressive mode," Working Papers 14/2012, Stellenbosch University, Department of Economics.
  7. Peter C. B. Phillips & Shu-Ping Shi & Jun Yu, 2013. "Testing for Multiple Bubbles 2: Limit Theory of Real Time Detectors," Working Papers 05-2013, Singapore Management University, School of Economics.
  8. Christophe Andre & Rangan Gupta & Patrick T. Kanda, 2012. "Do House Prices Impact Consumption and Interest Rate? Evidence from OECD Countries using an Agnostic Identification Procedure," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 58(1), pages 19-70.
  9. 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.
  10. Vittorio Peretti & Rangan Gupta & Roula Inglesi-Lotz, 2012. "Do House Prices Impact Consumption and Interest Rate in South Africa? Evidence from a Time-Varying Vector Autoregressive Model," Working Papers 201216, University of Pretoria, Department of Economics.
  11. 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.
  12. Goodness C. Aye & Rangan Gupta & Mampho P. Modise, 2012. "Do Stock Prices Impact Consumption and Interest Rate in South Africa? Evidence from a Time-Varying Vector Autoregressive Model," Working Papers 201224, University of Pretoria, Department of Economics.
  13. Rangan Gupta & Charl Jooste & Kanyane Matlou, 2013. "A Time-Varying Approach to Analysing Fiscal Policy and Asset Prices in South Africa," Working Papers 201303, University of Pretoria, Department of Economics.
  14. Nicholas Apergis & Beatrice D. Simo-Kengne & Rangan Gupta, 2013. "The Long-Run Relationship between Consumption, House Prices and Stock Prices in South Africa: Evidence from Provincial-Level Data," Working Papers 201326, University of Pretoria, Department of Economics.

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