Changes in the relationship between interest rates and housing prices in South Africa around the 2007 financial crisis

Kolisi, Nwabisa and Phiri, Andrew (2017): Changes in the relationship between interest rates and housing prices in South Africa around the 2007 financial crisis.

Abstract

In this study we investigate the cointegration relationship between interest rates and housing prices in South Africa using the autoregressive distributive (ARDL) model applied to quarterly data covering the post inflation targeting period of 2002:Q1 and 2016:Q4. Our empirical consists of splitting the empirical data into two sub-periods, one corresponding to the pre-crisis period (i.e. 2002:Q1 – 2008:Q2) and the other corresponding to the post-crisis periods (i.e. 2008:Q3 – 2016:Q4). Indeed, our empirical results confirm changing dynamics of the interest rate-housing price relationship in light of the financial crisis with the Reserve Bank appearing to respond to changes in the housing price growth in the post-crisis period. This results reflect the strong macropudential stance which the Reserve Bank has recently assumed after the sub-prime crisis and such policy stance critically depends on monitoring asset prices such as housing and property prices as a means of assessing market conditions.

• Item Type: MPRA Paper
• Language: English
• Keywords: Interest rates; Housing prices; Monetary policy; Cointegration; ARDL model; South Africa; Emerging economy
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy

References

Anari A. and Kolari J. (2002), “House prices and inflation”, Real Estate Economics, 30(1), 67-84.

Barrell R., Costantini M. and Meco I. (2015), “Housing wealth, financial wealth, and consumption: New evidence for Italy and the UK”, International Review of Financial Analysis, 42, 316-323.

Bjornland and Jacobsen (2010), “The role of house prices in the monetary policy transmission mechanism in small open economies”, Journal of Financial Stability, 6, 218-229.

Caporale G. and Gil-Alana L. (2015), “U.S. disposable personal income and a housing price index: A fractional integration analysis”, Journal of Hosing Research, 24(1), 73-86.

Costello G., Fraser P. and MacDonald G. (2015), “Monetary policy influences in Australian housing markets”, International Journal of Housing Markets and Analysis, 8(2), 265-286.

Das S., Gupta R. and Kanda R. (2011), “Bubbles in South African house prices and their impact on consumption”, Journal of Real Estate Literature, 19(1), 71-91.

Elbourne A. (2008), “The UK housing market and the monetary policy transmission mechanism: An SVAR approach”, Journal of Housing Economics, 17, 65-87.

Estevao M. and Tsounta E. (2011), “Has the great recession raised structural unemployment”, IMF Working Paper No. 11-105, May.

Fraser P., Hoesli M. and McAlevey L. (2012), “House prices, disposable income and permanent and temporary shocks”, Journal of European Real Estate Research, 5(1), 5-28.

Gallin J. (2006), “The long-run relationship between house prices and income: Evidence from local housing markets”, Real Estates Economics, 34(3), 417-438.

Giuliodori M. (2005), “Monetary policy shocks and the role of house prices across European countries”, Scottish Journal of Political Economy, 52(4), 847-859.

Gupta R. and Kabundi A. (2010), “The effect of monetary policy on house price inflation: A factor augmented vector autoregressive (FAVAR) approach”, Journal of Economic Studies, 27(1), 315-232.

Gupta R., Jurgilas M. and Kabundi A. (2010), “The effect of monetary policy on real house price growth in South Africa: factor-augmented vector autoregressive (FAVAR) approach”, Economic Modelling, 27(1), 315-232.

Gupta R. and Kasai N. (2011), “Financial liberalization and the effectiveness of monetary policy on hose prices in South Africa”, The UIP Journal of Monetary Economics, 8(4), 59-74.

Iacoviello M. (2004), “Consumption, house prices, and collateral constraints: A structural econometric analysis”, Journal of Housing Economics, 13(4), 304-320.

Jiang F. (2012), “The study of the relationship between house price and price tolerance in China from the perspective of system engineering”, Systems Engineering Procedia, 5, 74-80.

Mishkin F. (2007), “Housing and the monetary transmission mechanism”, NBER Working Papers No. 13518, October.

Mitchell-Innes H., Aziakpono M. and Faure A. (2007), “Inflation targeting and the Fisher effect in South Africa”, South African Journal of Economics, 75, 693-707.

Ncube M. and Ndou E. (2011), “Monetary policy transmission, house prices and consumer spending in South Africa: An SVAR approach”, African Development Bank Working Paper No. 133, June.

Pesaran H., Shin Y. and Smith R. (2001), “Bounds testing approaches to the analysis of levels relationships”, Journal of Applied Econometrics, 16(3), 289-326.

Phiri A. (2012), “Threshold effects and inflation persistence in South Africa”, Journal of Financial Economic Policy, 4(3), 247-269.

Phiri A. (2016), “Did the global financial crisis alter the equilibrium adjustment between the US federal fund rates and stock price volatility in the SSA region”, Economics Bulletin, 36(2), 778-788.

Phiri A. (2017), “Long-run equilibrium adjustment between inflation and stock market returns in South Africa”, International Journal of Sustainable Economy, 9(1), 19-33.

Phiri A. and Lusanga P. (2011), “Can asymmetries account for the empirical failure of the Fisher effect in South Africa”, Economics Bulletin, 31(3), 1968-1979.

Shi S., Jou J. and Tripe D. (2014), “Can interest rates really control house prices? Effectiveness and implications for macroprudential policy”, Journal of Banking and Finance, 47, 15-28.

Simo-Kengne B., Balcilar M., Gupta R., Reid M. and Aye G. (2013), “Is the relationship between monetary policy and house prices asymmetric across bull and bears in South Africa? Evidence from a Markov-Switching vector autoregressive model”, Economic Modelling, 32, 161-171.

Tsai I. (2013), “The asymmetric impacts of monetary policy on housing prices: A viewpoint of housing price rigidity”, Economic Modelling, 31, 405-413.

Tse C., Rodgers T. and Niklewski J. (2014), “The 2007 financial crisis and the UK residential housing market: Did the relationship between interest rates and house prices change?”, Economic Modelling, 37, 518-530.

Vargas-Silva C. (2008), “Monetary policy and the US housing market: A VAR analysis imposing sign restrictions”, Journal of Macroeconomics, 30, 977-990.

Wudud I., Bashar O. and Ahmed H. (2012), “Monetary policy and the housing market in Australia”, Journal of Policy Modelling, 34, 849-863.

Xu X. and Chen T. (2012), “The effect of monetary policy on real estate price growth in China”, Pacific-Basin Finance Journal, 20, 62-77.

Yang Z., Wang S. and Campbell R. (2010), “Monetary policy and regional price boom in Sweden”, Journal of Policy Modelling, 32, 865-879.