Interactive influence of house prices and the repo rate on household debt in South Africa
DOI:
https://doi.org/10.58567/jea03010003Keywords:
House prices; repo rate; household debt; Markov Switching; interactive effectAbstract
The recent interest rate policy decisions of the South African Reserve Bank have been criticized significantly by left-leaning political parties and civic society organisations for being anti-poor, anti-labour, and pro-capital because of their implications for household debt. Existing literature has established that interest rates and house prices are insignificant determinants of household debt dynamics in South Africa. Taking advantage of additional data for the period 2013-2022, and contrary to the previous studies, the paper maintains that house prices and the central bank policy rate play a crucial role in household debt dynamics. Applying a Markov Switching regression to quarterly data for the period 1981Q1 to 2022Q1, the paper finds that house prices and the policy rate have a significant influence on household debt dynamics. It establishes the existence of a ‘house price boom, low policy rate burden’ regime and a ‘high policy rate burden, low house price’ regime. The coexistence of the ‘house price boom’ and the ‘low policy rate’ explains the debt euphoria characterised by significant household leveraging.
References
Abd Samad, K., Mohd Daud, S. N., & Mohd Dali, Nuradli Ridzwan Shah. (2020). Determinants of household debt in emerging economies: A macro panel analysis. Cogent Business & Management, 7(1), 1831765. https://doi.org/10.1080/23311975.2020.1831765
Alpanda, S., & Zubairy, S. (2019). Household debt overhang and transmission of monetary policy. Journal of Money, Credit and Banking, 51(5), 1265-1307. https://doi.org/10.1111/jmcb.12548.
Alter, A., Feng, A. X., & Valckx, N. (2018). Understanding the macro-financial effects of household debt: A global perspective International Monetary Fund. https://www.imf.org/en/Publications/WP/Issues/2018/04/06/Understanding-the-Macro-Financial-Effects-of-Household-Debt-A-Global-Perspective-45744.
Aron, J., & Muellbauer, J. (2000). Personal and corporate saving in South Africa. The World Bank Economic Review, 14(3), 509-544. https://doi.org/10.1093/wber/ 14.3.509.
Bank of International Settlements. Central Bank policy rates. https://www.bis.org/statistics/cbpol/cbpol.xlsx.
Berisha, E., Meszaros, J., & Olson, E. (2018). Income inequality, equities, household debt, and interest rates: Evidence from a century of data. Journal of International Money and Finance, 80, 1-14. doi:10.1016/j.jimonfin.2017.09.012.
Boyce, C. J., Delaney, L., Ferguson, E., & Wood, A. M. (2018). Central bank interest rate decisions, household indebtedness, and psychiatric morbidity and distress: Evidence from the UK. Journal of Affective Disorders, 234, 311-317. 10.1016/j.jad.2018.03.003.
Chantarat, S., Lamsam, A., Samphantharak, K., & Tangsawasdirat, B. (2020). Household debt and delinquency over the life cycle. Asian Development Review, 37(1), 61-92. https://ssrn.com/abstract=3555403.
Chatterjee, A., Czajka, L., & Gethin, A. (2022). Wealth inequality in South Africa, 1993–2017. The World Bank Economic Review, 36(1), 19-36. https://doi.org/10.1093/wber/lhab012.
Cloyne, J., Huber, K., Ilzetzki, E., & Kleven, H. (2019). The effect of house prices on household borrowing: A new approach. American Economic Review, 109(6), 2104-2136. https://doi.org/10.1257/aer.20180086.
Coletta, M., De Bonis, R., & Piermattei, S. (2019). Household debt in OECD countries: The role of supply-side and demand-side factors. Social Indicators Research, 143(3), 1185-1217. https://doi.org/10.1007/s11205-018-2024-y.
Coskun, Y., Seven, U., Ertugrul, H. M., & Alp, A. (2020). Housing price dynamics and bubble risk: The case of Turkey. Housing Studies, 35(1), 50-86. https://doi.org/10.1080/02673037.2017.1363378.
Costantini, O., & Seccareccia, M. (2020). Income distribution, household debt and growth in modern financialized economies. Journal of Economic Issues, 54(2), 444-453. https://doi.org/10.1080/00213624.2020.1752537.
Cumming, F., & Hubert, P. (2022). House prices, the distribution of household debt and the refinancing channel of monetary policy. Economics Letters, 212, 110280. doi:10.1016/j.econlet.2022.110280
Daud, S. N. M., Podivinsky, J. M., & Abd Samad, K. (2021). Household debt and country economic growth: Does a magic threshold exist? International Journal of Business and Society, 22(1), 161-174. https://doi.org/10.33736/ijbs.3168.2021.
De Stefani, A. (2020). Debt, inequality and house prices: Explaining the dynamics of household borrowing prior to the great recession. Journal of Housing Economics, 47, 101601. https://doi.org/10.1016/j.jhe.2018.09.001.
Debelle, G. (2004). Household debt and the macroeconomy. BIS Quarterly Review, March, 51-64.
Dynan, K., Mian, A., & Pence, K. M. (2012). Is a household debt overhang holding back consumption? [with comments and discussion]. Brookings Papers on Economic Activity, Spring , 299-362. https://www.jstor.org/stable/23287219.
Federal Reserve Bank of St. Louis. Real residential property prices for South Africa. https://fred.stlouisfed.org/series/QZAR628BIS.
Flodén, M., Kilström, M., Sigurdsson, J., & Vestman, R. (2021). Household debt and monetary policy: Revealing the cash-flow channel. The Economic Journal, 131(636), 1742-1771. https://doi.org/10.1093/ej/ueaa135.
Forslund, D. (2013). Mass unemployment and the low wage regime in south Africa. New South African Review, 3, 95-118. https://aidc.org.za/download/Mass-unemployment-and-the-low-wage-regime-in-South-Africa.pdf.
Goldstein, A. (2013). Inequality, financialization, and the growth of household debt in the US, 1989-2007. Institute for New Economic Thinking (INET) Grantee Paper, https://www.ineteconomics.org/uploads/papers/Inequality-Financialization-and-the-Growth-of-Household-Debt.pdf.
Hamdar, B., Skheita, Y., & Hamdar, M. B. (2022). An econometric approach to assess the impact of negative interest rate policy (NIRP) on real estate price inflation in the eurozone. Economics, 11(1), 49-68. http://dx.doi.org/10.11648/j.eco.20221101.17.
Hamilton, J. D. (1994). Time series analysis. Princeton: Princeton university press.
Hamilton, J. D., & Raj, B. (2002). Advances in Markov-switching models: Applications in business cycle research and finance Springer Science & Business Media.
Hays, C. (2018). A global view of household debt. Bloom Economic Research Division, 20(11), (Accessed from http://connorhays.com/papers/CH-2018-A-Global-View-of-Household-Debt.pdf).
Hickel, J. (2021). The (anti) politics of central banking: Monetary policy, class conflict and the limits of sovereignty in South Africa. Economy and Society, 50(1), 57-77. http://dx.doi.org/10.1080/03085147.2021.1841931.
Jacobsen, D. H., & Naug, B. E. (2004). What influences the growth of household debt? Norges Bank Economic Bulletin, 75(3), 103-111. https://www.norges-bank.no/globalassets/upload/publikasjoner/economic_bulletin/2004-03/jacobsen.pdf.
Keen, S. (1995). Finance and economic breakdown: Modeling Minsky’s “financial instability hypothesis”. Journal of Post Keynesian Economics, 17(4), 607-635. https://www.jstor.org/stable/4538470.
Kwon, Y., & Park, S. Y. (2023). Modeling an early warning system for household debt risk in Korea: A simple deep learning approach. Journal of Asian Economics, 84, 101574. doi:10.1016/j.asieco.2022.101574
Lombardi, M. J., Mohanty, M. S., & Shim, I. (2017). The real effects of household debt in the short and long run. BIS WP607 (Accessed from https://ssrn.com/abstract=2906555 )
Lowe, P. (2017). Household debt, housing prices and resilience. Economic Analysis and Policy, 55, 124-131. doi:10.1016/j.eap.2017.05.007
Marire, J. (2023). Do fiscal deficits influence private savings in South Africa? an empirical note. Journal of Economic and Financial Sciences, 16(1), 1-13. doi:https:// doi.org/10.4102/jef.v16i1.809
Meng, X., Hoang, N. T., & Siriwardana, M. (2013). The determinants of Australian household debt: A macro level study. Journal of Asian Economics, 29, 80-90. https://doi.org/10.1016/j.asieco.2013.08.008.
Meniago, C., Mukuddem-Petersen, J., Petersen, M. A., & Mongale, I. P. (2013). What causes household debt to increase in South Africa? Economic Modelling, 33, 482-492. https://doi.org/10.1016/j.econmod.2013.04.028.
Merrino, S. (2022). Monetary policy and wage inequality in South Africa. Emerging Markets Review, 53, 100911. https://doi.org/10.1016/j.ememar.2022.100911
Mian, A., & Sufi, A. (2016). Who bears the cost of recessions? the role of house prices and household debt. Handbook of Macroeconomics, 2, 255-296. https://doi.org/10.1016/bs.hesmac.2016.03.005.
Mian, A., Sufi, A., & Verner, E. (2017). Household debt and business cycles worldwide. The Quarterly Journal of Economics, 132(4), 1755-1817. https://doi.org/10.1093/qje/qjx017.
Montgomerie, J. (2006). Giving credit where it's due: Public policy and household debt in the United States, the United Kingdom and Canada. Policy and Society, 25(3), 109-141. https://doi.org/10.1016/S1449-4035(06)70085-6.
Moore, G. L., & Stockhammer, E. (2018). The drivers of household indebtedness reconsidered: An empirical evaluation of competing arguments on the macroeconomic determinants of household indebtedness in OECD countries. Journal of Post Keynesian Economics, 41(4), 547-577. https://doi.org/10.1080/01603477.2018.1486207.
Mutezo, A. (2014). Household debt and consumption spending in south Africa: An ARDL-bounds testing approach. Banks & Bank Systems, 9(4), 73-81. https://www.researchgate.net/publication/299246637_Household_debt_and_consumption_spending_in_South_Africa_An_ARDL-bounds_testing_approach.
Nomatye, A., & Phiri, A. (2017). Investigating the macroeconomic determinants of household debt in South Africa. (Accessed from https://mpra.ub.uni-muenchen.de/83303/).
Piao, Y., Li, M., Sun, H., & Yang, Y. (2023). Income inequality, household debt, and consumption growth in the united states. Sustainability, 15(5), 3910.
Prinsloo, J. W. (2002). Household debt, wealth and saving. Quarterly Bulletin, 63(78), 290-296. https://www.resbank.co.za/content/dam/sarb/publications/quarterly-bulletins/articles-and-notes/2002/4776/Article---Household-debt-wealth-and-saving.pdf.
Scatigna, M., Szemere, R., & Tsatsaronis, K. (2014). Residential property price statistics across the globe. BIS Quarterly Review September, 61-76. https://www.bis.org/publ/qtrpdf/r_qt1409h.htm.
South African Reserve Bank v Public Protector & Others. CASE NO: 43769/17. High Court of South Africa.
Stefani, A. D. (2020). Debt, inequality and house prices: Explaining the dynamics of household borrowing prior to the great recession. Journal of Housing Economics, 47, 101601. doi:10.1016/j.jhe.2018.09.001
Stockhammer, E. R., & Wildauer, R. (2018). Expenditure cascades, low interest rates or property booms? determinants of household debt in OECD countries. Review of Behavioral Economics, 5(2), 85. http://dx.doi.org/10.1561/105.00000083.
Valderrama, L., Gorse, P., Marinkov, M., & Topalova, P. B. (2023). European housing markets at a turning Point–Risks, household and bank vulnerabilities, and policy options. IMF Working paper WP/23/76. (Accessed from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4410559).
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2024 Juniours Marire
This work is licensed under a Creative Commons Attribution 4.0 International License.