MACRO SHOCKS AND HOUSE PRICES IN SOUTH AFRICA

This paper analyses the economic sources underlying the comovement of real house prices in South Africa. We use quarterly provincial-level data from 1974:Q1 to 2011:Q4. First, we disentangle the national component of real house price movements from the local (provincial or region-specific) shocks using a dynamic factor model. The results indicate that recent (2001-2011) fluctuations in house prices were mainly driven by the national component. However, historical movements in real estate prices appear to be a local phenomenon. Second, we assess the effects of monetary policy, portfolio, aggregate supply and aggregate demand shocks on the common (national) component of real house prices using a SVAR model. Our findings show that macro shocks are important sources of house price fluctuations, with portfolio and monetary policy shocks playing greater roles. An historical decomposition confirms the primary role of portfolio and monetary policy shocks in driving house price dynamics over the sample period while aggregate supply shocks are of limited influence. We conclude that comovement in real house prices is due to the combined effects of favourable and unfavourable structural shocks emanating from different sectors of the South African economy.