Political risk and macroeconomic effect of housing prices in South Africa

Abstract

The housing market is one of the key drivers of economic growth and social welfare in South Africa. However, the performance of the market depends on housing prices which are also subjected to changes in various socio-economic and political factors. The main purpose of this study is to determine the effects of inflation (consumer price index), interest rate, rental price and political risk on housing prices. To achieve this objective, the study applies Vector Autoregressive (VAR) model, the Johansen test for cointegration, Vector Error Correction Model (VECM) and Granger causality test on monthly data starting from January 2002 to December 2019. Findings of the study suggest that inflation, interest rate, rental and political risk influence the housing prices in both the long run and short run. Changes in political risk and rental price cause a long-run decline in housing prices while high-interest rates and inflation cause an increase in housing prices. Based on findings, researchers propose stability in the inflation rate, interest rate and political situation as a solution that can assist to improve the housing market and create price stability. Additionally, interest rate reduction can generate growth in housing demand resulting in the country’s economic improvement.

Keywords:

• housing price
• inflation
• interest rate
• political risk
• lent price
• South Africa

PUBLIC INTEREST STATEMENT

This research offers insight for investors, policymakers, government and other relevant stakeholders in the housing markets. With political and macroeconomic instabilities in South Africa, we are presented with a new opportunity to analyse the effect of political risk and macroeconomic fluctuations on price volatility within the South African housing market. To this end, it is indispensable to find an adequate approach that elucidates the housing market behaviour resulting from political and economic uncertainties to provide useful information to investors and policymakers. The finding of this study suggested that investors in the housing business should consider the movement of other factors, besides the housing price, such as housing location, country’s inflation, interest rate and the stability of governing institutions as the latter determine the failure or success of housing business. Having enough information on country risk and macroeconomic status can assist both investors and policymakers in forecasting future prices in the housing market.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Zandri Dickason

Prof Zandri Dickason-Koekemoer specialises in financial risk management has obtained her PhD degree in this field. She researches various areas of Risk Management where her main focus area is on financial risk tolerance, depositor behaviour, investor behaviour, behavioural finance, and the financial well-being of investors. This researcher has already published several articles in accredited journals regarding this field of interest. Dr Thomas Habanabakize is an economist specialist. He is currently doing a postdoctoral research fellowship at North-West University, South Africa. His research interests include the intersection between microeconomics, macroeconomics, economic development, labour economics, time series modelling, econometrics and financial economics.