DO HOUSE PRICES IMPACT CONSUMPTION AND INTEREST RATE IN SOUTH AFRICA? EVIDENCE FROM A TIME-VARYING VECTOR AUTOREGRESSIVE MODEL
DO HOUSE PRICES IMPACT CONSUMPTION AND INTEREST RATE IN SOUTH AFRICA? EVIDENCE FROM A TIME-VARYING VECTOR AUTOREGRESSIVE MODEL

Summary/Abstract: This paper investigates the existence of spillovers from the housing sector onto consumption and the interest rate for South Africa using a time-varying vector autoregressive (TVP-VAR) model with stochastic volatility. In this regard, we estimate a three-variable TVP-VAR model comprising of real consumption growth rate, the nominal three-months Treasury bill rate and the growth rate of real house prices. The results suggest that, in general, consumption responded positively to a house price shock over the entire sample, with the effect being stronger post financial liberalization. On the other hand, a positive delayed response of nominal interest rate followed a house price shock, with the effect being weaker post financial liberalization until the South African Reserve Bank (SARB) moved to the official inflation-targeting regime. The effect of house prices on both consumption and interest rate was understandably weak during the financial crisis.

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