The Long-Run Relationship between Consumption, House Prices and Stock Prices in South Africa: Evidence from Provincial-Level Data

This paper empirically examines the long-run impact and short-term dynamics of housing wealth and financial wealth on household consumption in South Africa using annual provincial-level panel data for the period 1995 to 2011. Based on available data, recently developed econometric techniques for heterogeneous panel cointegration analysis are applied which allows us to circumvent the data restrictions, given that observations are pooled across provinces. The empirical results provide strong evidence of a stable long-run relationship between household consumption, income and (housing and stock market) wealth in South Africa. We then estimate the long-run elasticities of income and wealth with respect to consumption. The results indicate that income elasticity is not significantly different from unity, hence corroborating the permanent income hypothesis. As expected, the marginal propensity to consume out of housing wealth and stock market wealth is positive and significant, implying that consumption spending adjusts to both house price and stock price fluctuations. Interestingly, the marginal propensity to consume out of housing wealth is found to be smaller than that of the stock market wealth. Based on the panel ECM, the causality between consumption and both forms of wealth is bi-directional in the long-run, which contrasts the unidirectional causality running from wealth to consumption in the short run.