Housing price and interest rate in South Africa: An empirical investigation in a nonlinear framework

Abstract

This study aims to investigate the nonlinear connection between housing prices and interest rates by analyzing monthly data from January to March 2023. Initial assessments of variable integration, cointegration, Granger causality, and impulse response analyses were conducted using linear models. Nonlinear methods were applied to identify asymmetrical relationships between housing prices and interest rates. A threshold vector autoregressive model was employed to uncover the dynamic asymmetric relationship. The Markov switching model was used to assess the persistence of interest rate effects on housing prices in both regimes. Empirical findings suggest a nonlinear causal relationship between housing prices and interest rates. The results indicate that the impact of interest rates on housing prices tends to persist in both regimes. This study underscores the significance of interest rates as a key driver of housing prices in the South African economy.