The Long-Run Relationship Between Consumption, House Prices, and Stock Prices in South Africa: Evidence from Provincial-level Data

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.