Assessing the Effects of Housing Market Shocks on Output: The Case of South Africa

Njindan Iyke, Bernard (2015): Assessing the Effects of Housing Market Shocks on Output: The Case of South Africa.

Abstract

This paper assessed the effects of housing market shocks on real output in South Africa over the period 1969Q4 – 2014Q4, by emphasizing the real private consumption channel. The agnostic identification procedure employed in this paper has delivered impulse responses that are overall consistent with the existing literature. The paper appropriately identified housing market shocks as non-monetary housing demand shocks. 20% of the variation in house prices are explained by the housing market shocks. The effects of housing demand shocks on real private consumption are short-lived, explaining why real output responded transitorily to these shocks. Housing demand shocks have managed to explain nearly 13% and 14% variations in real private consumption and real output, respectively, over 20-quarters ahead forecast revision.

• Item Type: MPRA Paper
• Language: English
• Keywords: Agnostic Identification, Housing Market Shocks, Real Output, SVAR, South Africa
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C11 - Bayesian Analysis: General; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location > R31 - Housing Supply and Markets

References

André, C., Gupta, R., and Kanda, P. T. (2012). Do House Prices Impact Consumption and Interest Rates? Evidence from OECD Countries using an Agnostic Identification Procedure. Applied Economics Quarterly: 58(1): 19-70.

Aoki, K., J. Proudman and Vlieghe, G. (2002). Houses as Collateral: Has the Link between House Prices and Consumption in the UK Changed? Federal Reserve Bank of New York Economic Policy Review, 8(1).

Banks, J., Blundell, R. and Tanner, S. (1998). Is there a retirement saving puzzle? American Economic Review, 88(4): 769-788.

Bassanetti, A. and Zollino, F. (2010). The Effects of Housing and Financial Wealth on Personal Consumption: Aggregate Evidence for Italian Households, in: de Bandt, O., T. Knetsch, J. Peñalosa and F. Zollino (eds), Housing Markets in Europe, A Macroeconomic Perspective, Springer.

Bernanke, B. S. (1986). Alternative explanations of the money–income correlation. In: Brunner, K., Meltzer, A. (Eds.), Real Business Cycles, Real Exchange Rates, and Actual Policies. Carnegie-Rochester Conference Series on Public Policy, vol. 25. North-Holland, Amsterdam.

Bernanke, B. S., Mihov, I. (1998a). Measuring monetary policy. Quarterly Journal of Economics 113(3): 869–902.

Bernanke, B. S., Mihov, I. (1998b). The liquidity effect and long-run neutrality: identification by inequality constraints. Carnegie-Rochester Conference Series on Public Policy 49 (0): 149–194.

Bjørnland, H. C. and Jacobsen, D. H. (2010). The role of house prices in the monetary policy transmission mechanism in small open economies. Journal of Financial Stability, 6(4): 218-229.

Blanchard, O. J., Quah, D. (1989). The dynamic effects of aggregate demand and supply disturbances. American Economic Review 79: 655–673.

Blanchard, O., Watson, M. (1986). Are all business cycles alike? In: Gordon, R.J. (Ed.), The American Business Cycle. University of Chicago Press, Chicago, pp. 123–160.

Bulligan, G. (2010). Housing and the Macroeconomy: The Italian Case, in: de Bandt, O., T. Knetsch, J. Peñalosa and F. Zollino (eds), Housing Markets in Europe, A Macroeconomic Perspective, Springer.

Canova, F. (2007). Methods for Applied Macroeconomic Research, Princeton, NJ: Princeton University Press.

Canova, F., De Nicoló, G. (2002). Monetary disturbances matter for business fluctuations in the G-7. Journal of Monetary Economics 49 (6): 1131–1159.

Canova, F. and Gambetti, L. (2004). Structural Changes in the US Economy: Bad Luck or Bad Policy? (Manuscript, Universitat Pompeu Fabra, August 2004).

Case, K., Shiller, R., and Quigley, J. (2005). Comparing Wealth Effects: The Stock Market Versus the Housing Market. Advances in Macroeconomics, 5:1-32.

Christiano, L., Eichenbaum, M., Evans, C. (1999). Monetary policy shocks: what have I learned and to what end? In: Woodford, M., Taylor, J.B. (Eds.), Handbook of Macroeconomics. North-Holland, Amsterdam, pp. 65–148.

Cogley, T. and Sargent, T. (2005). Drifts and Volatilities: Monetary Policies and Outcomes in the Post WWII U.S. Review of Economic Dynamics 8: 262–302.

Darracq Pariès, M. and Notarpietro, A. (2008). Monetary policy and housing prices in an estimated DSGE model for the US and the euro area. European Central Bank Working Paper, No. 972.

Disney, R., Henley, A. and Stears, G. (2002). Housing costs, house price shocks and savings behaviour among older households in Britain. Regional Science and Urban Economics, 32: 607-625.

Engelhardt, G.V. (1996). House prices and homeowner saving behaviour. Regional Science and Urban Economics, 26: 313-336.

Faust, J. (1998). The robustness of identified VAR conclusions about money. Carnegie-Rochester Conference Series in Public Policy 49: 207–244.

Fry, R. and Pagan, A. (2011). Sign restrictions in structural vector autoregressions: A critical review. Journal of Economic Literature 49: 938-960.

Gambetti, L. and Canova, F. (2008). Structural Dynamics of US Output and Inflation: What Explains the Changes? Journal of Money, Credit, and Banking 40: 369–388.

Ghent, A. C. and Owyang, M. T. (2010). Is housing the business cycle? Evidence from US cities. Journal of Urban Economics 67(3): 336-351.

Goodhart, C. and Hofmann, B. (2008). House prices, money, credit, and the macroeconomy. Oxford Review of Economic Policy 24(1): 180-205.

Gupta, R., Jurgilas, M. and Kabundi, A. (2010). The Effect of Monetary Policy on Real House Price Growth in South Africa: A Factor Augmented Vector Autoregression (FAVAR) Approach. Economic Modelling 27(1):315-323.

Iacoviello, M. and Neri S. (2010). Housing Market Spillovers: Evidence from an Estimated DSGE Model. American Economic Journal: Macroeconomics 2:125-164.

Jarocinski, M. and Smets, F. (2008). House Prices and the Stance of Monetary Policy. European Central Bank Working Paper, No. 891.

Leamer, E. E. (2007). Housing is the Business Cycle. Federal Reserve Bank of Kansas City Proceedings, 149-233.

Mishkin, F. (2007). Housing and the monetary transmission mechanism. Proceedings, Federal Reserve Bank of Kansas City.

Moon, H. R., Schorfheide, F. and Granziera, E. (2013). Inference for VARs Identified with Sign Restrictions. unpublished manuscript. University of Southern California, University of Pennsylvania, and Bank of Canada.

Muellbauer, J. and Murphy, A. (2008). Housing Markets and the Economy: the Assessment. Oxford Review of Economic Policy 24(1): 1-33.

Musso, A., Neri, S. and Stracca, L. (2011). Housing, consumption and monetary policy: How different are the US and the euro area? Journal of Banking and Finance 35: 3019-3041.

Pavlidis, E., Paya, I., Peel, D. and Spiru, A. (2009). Bubbles in House Prices and their Impact on Consumption: Evidence for the US. Lancaster University Management School Working Paper.

Phang, S.Y. (2004). House prices and aggregate consumption: do they move together? Evidence from Singapore. Journal of Housing Economics (13): 101-119.

Primiceri, G. E. (2005). Time Varying Structural Vector Autoregressions and Monetary Policy. Review of Economic Studies 72: 821–852.

Rubio-Ramírez, J. F., Waggoner, D. F. and Zha, T. (2005). Markov-Switching Structural Vector Autoregressions: Theory and Application. Federal Reserve Bank of Atlanta, Working Paper 2005-27.

Rubio-Ramírez, J., Waggoner, D. and Zha, T. (2010). Structural Vector Autoregressions: Theory of Identification and Algorithms for Inference. Review of Economic Studies 77: 665-696.

Simo-Kengne, B. D., Gupta, R., and Bittencourt, M. (2013). The Impact of House Prices on Consumption in South Africa: Evidence from Provincial-Level Panel VARs. Housing Studies, 28(8): 1133-1154.

Sims, C.A., 1986. Are forecasting models usable for policy analysis. Minneapolis Federal Reserve Bank Quarterly Review Winter, 2–16.

Sims, C. A. and Zha, T. (2006). Were There Regime Switches in US Monetary Policy? American Economic Review 96: 54–81.

Stock, J.H., Watson, M. W. (2003). Forecasting output and inflation: the role of asset prices. Journal of Economic Literature 41: 788–829.

Taylor, J. B. (2007). Housing and monetary policy. Proceedings, Federal Reserve Bank of Kansas City.

Uhlig, H. (1997). Bayesian vector autoregressions with stochastic volatility. Econometrica 65 (1): 59–73.

Uhlig, H. (2005). What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure. Journal of Monetary Economics 52: 381-419.

Vargas-Silva, C. (2008). Monetary Policy and the US Housing Market: A VAR Analysis Imposing Sign Restrictions. Journal of Macroeconomics, 30(3): 977-990.