Changes in the relationship between interest rates and housing prices in South Africa around the 2007 financial crisis

In this study we investigate the cointegration relationship between interest rates and housing prices in South Africa using the autoregressive distributive (ARDL) model applied to quarterly data covering the post inflation targeting period of 2002:Q1 and 2016:Q4. Our empirical consists of splitting the empirical data into two sub-periods, one corresponding to the pre-crisis period (i.e. 2002:Q1 – 2008:Q2) and the other corresponding to the post-crisis periods (i.e. 2008:Q3 – 2016:Q4). Indeed, our empirical results confirm changing dynamics of the interest rate-housing price relationship in light of the financial crisis with the Reserve Bank appearing to respond to changes in the housing price growth in the post-crisis period. This results reflect the strong macropudential stance which the Reserve Bank has recently assumed after the sub-prime crisis and such policy stance critically depends on monitoring asset prices such as housing and property prices as a means of assessing market conditions.