The interaction between property returns and the macroeconomy: Evidence from South Africa

Abstract

A study on the interactions between property returns and the macro-economy in the UK provides contrasting results with those based on the American economy which forms the basis for this research (Brooks and Tsolacos 1999). This study therefore employs a vector autoregressive models to establish the interactions between macroeconomic and financial variables on the South African economy, a proxy for developing and transitional economies. Property assets have generally been viewed as value-growth assets due to their inflation tracking nature. Values of property-based assets may be measured through direct measures and/or equity-based measures. The two different methods of measuring the value of property-based assets available are shrouded with drawbacks although equity-based measures are theoretically preferred. This study uses direct measures to determine the impulse response functions and variance decompositions on the rate of short-term nominal rates, long-term and short-term interest differentials, inflation rate and household debt/ disposable income in South Africa.