Abstract:
This empirical study analyzes the long run behavior of provincial house prices in
South Africa based on the club convergence and clustering procedure of Phillips and Sul.
Using quarterly data covering the period of 1976Q2–2012Q4, 1974Q1–2012Q4 and 1977Q3–
2012Q4 for the large, medium, and small middle segments of the housing market,
respectively, we test the law of one price across nine provinces. The empirical findings
suggest that the nine provinces do not form a homogeneous convergence club. Unlike the
small middle segment, which consists of two convergence clubs of seven and two provinces,
the large and medium middle segments have three convergence clubs corresponding to three
segmented independent local markets. Possible intuitive explanations for the existence of
such clubs are discussed and resulting policy implications provided.
