Market sentiment in emerging economies: evidence from the South African property market

Abstract

Purpose Market sentiment has shown to influence housing prices in the global north, but in emerging economies, the nexus is rare to chance on in the current state of science for policy direction. More importantly in the recent decade where policymakers are yet to conclude on the myriad of factors confronting the housing market in sub-Saharan Africa inhibiting affordability. This paper therefore examines the impact of market sentiment on house prices in South Africa. Design/methodology/approach The study used the Autoregressive Distributed Lag (ARDL) approach with quarterly data spanning from 2005Q1 to 2020Q4. Findings In all, it was established that market sentiment plays a minimal role in the property market in South Africa. But there was enough evidence of cointegration from the bound test between sentiment and house prices. Nevertheless, the lag values of sentiment pointed to a rise in house prices. Exchange rate volatilities and inflation had a statistically significant effect on prices in both the long and short term, respectively. Research limitations/implications Policymakers could still monitor market sentiment in the housing market due to the strong chemistry between house prices and sentiment, as evidenced from the bound test, but focus on economic fundamentals as the main policy tool for house price reduction. Originality/value The findings and the creation of the sentiment index make an invaluable contribution to the paper and add to the paucity of literature on the study of market sentiment in the housing market.