The impact of the global financial crisis on the South African Property market

Abstract

Abstract: This study examines South African house prices with a view to determining whether the Global Financial Crisis (GFC) had an effect on those prices. The first part of this study discusses alternative investments and real estate as an investment and the risks that come with it. The study provides a timeline of events that occurred during the crisis period that resulted in the global financial crisis. The factors that caused the crisis are analysed to assess whether, had the 2007 – 2009 global financial crisis not occurred, the South African housing market would have prospered. In order to do this, historical house prices will need to be analysed and, with the assistance of forecasting models, we will see the difference in house prices. The ARIMA (autoregressive integrated moving average) model was used to forecast house prices. The results show that house prices were affected however the extent was not as severe as what the United States had experienced. Further analysis is done on how certain macroeconomic variables impacted house prices during that period. This study shows that the macroeconomic variables namely, prime interest rate, rand-dollar exchange rate, South Africa Household Debt to Disposable Income of Households (SABTHDIQ) Index, South Africa Nominal Household Disposable Income SA (SAGNDISA) Index have a long run equilibrium relationship. Prime interest rate and rand-dollar exchange rate have a negative impact on house prices. As disposable income increases, the demand for housing increases and results in an increase in house prices. The opposite is described for household debt to income as debt increases the demand for housing decreases and therefore a drop in house prices is expected. These relationships were evident during the GFC period for the prime interest rate and the randdollar exchange rate however disposable income increased and therefore the household debt to disposable income dropped due to the increase in disposable income. The results show that South Africa was affected by the GFC however not to the extent that a recession was triggered. The South African housing market was affected however due to the implementation of the National Credit Act in June 2007 and the countries fiscal policy at the time the housing market and the economy was sheltered from the full extent of the GFC. Previous studies have indicated similar results however in terms of the South African housing market during that time literature is limited and this study addresses that gap in literature. Further research can be done by adding in more macroeconomic variables to the study to give a broader understanding of the topic.M.Com. (Finance