The time-varying impact of foreign capital flows on house prices: evidence from South Africa

Abstract This study employs a time-varying parameter VAR with stochastic volatility (TVP-VAR) to investigate the time-varying impact of foreign capital flows on house prices in South Africa. The study also analyses the behaviour of the house price index using recursive unit root tests. The results of these tests show a statistically significant period of house price exuberance. The results of the TVP-VAR show a contemporaneous positive impact of foreign capital on house prices throughout the sample period, with the largest impact occurring during the period of house price exuberance. In addition, the international capital flows are found to aggravate the imbalances between demand and supply sides, thus enforcing the future house prices to comove with the housing supply.