Abstract:
We examine whether strong increases in housing and stock prices have helped sustain
consumption across provinces in South Africa from 1995 to 2011. We implement
panel cointegration techniques that allow us to circumvent the data restrictions,
providing that observations are pooled across provinces. The empirical results provide
strong evidence that household consumption adjusts to both house price and stock
price fluctuations. More interestingly, the increase in consumption due to house price
appreciation (housing wealth effect) is smaller than that generated by the rise in stock
prices (stock market wealth effect), possibly suggesting a high stock market
capitalization in South Africa. Additionally, we find a bidirectional causality between
consumption and both forms of wealth in the long-run, implying that changes in
consumption can be used to predict housing and stock price movements and vice
versa. Further, the long-run elasticity of income with respect to consumption is found
to be not significantly different from unity, therefore corroborating the permanent
income hypothesis.
