Impact of country risk and macroeconomic factors on South African housing market segments under different regimes.

Abstract

The housing property market in South Africa contributes to economic growth and attracts foreign investors, however, the market has fallen victim to price bubbles. Moreover, the South African housing market can be affected by various risk factors. The purpose of this study is to investigate and compare the presence of price bubbles across the South African housing segments, and to conduct an empirical analysis of the effects of country risk and macroeconomic factors on the South African housing market. The GSADF unit root test was employed to investigate the presence of price bubbles in the South African small, medium, and large houses. The Markov regime-switching of conditional mean model was used to evaluate the effects of financial, economic, and political risk factors of country risk on housing prices of different segments in bullish and bearish market conditions. The influence of macroeconomic factors namely, employment, households’ debt-to-disposable income ratio, and money supply growth rate on different housing segments in bullish and bearish market conditions was examined using the Markov switching vector autoregressive model. The study was conducted based on 263 monthly time-series data from January 1995 to November 2016. The results showed that there were five periods of explosive bubbles in the small housing segment, three periods of explosivity in the medium housing segment, and four periods of explosive bubbles in the large housing segment. In terms of the effects of country risk components on the three housing indices, it was found that the small house price index was significantly affected by economic risk in a bullish market condition whereas, the medium house price index was significantly influenced by financial risk and political risk in a bearish market condition. Moreover, the large house price index was significantly affected by financial risk and political risk in a bullish market condition. In terms of the impact of macroeconomic factors on housing prices, it was found that employment, household debt-to-disposable income ratio, and money supply growth rate have a significant influence on the three housing indices. This study concluded that the existence of price bubbles in the housing market differed across the three housing segments, and that the response of housing prices to shocks in country risk components and macroeconomic factors varied across the three housing segments and across the two market conditions. Therefore, this study presented the first comparison of price bubbles in the housing market and the response of the three housing segments to shocks in country risk components and macroeconomic factors in different market conditions.