This paper assesses the impact of monetary policy on real house price growth in South
Africa using a factor-augmented vector autoregression (FAVAR), estimated based on a
large data set comprising of 246 quarterly series over the period 1980:01 to 2006:04. The
results based on the impulse response functions indicate that, in general, house price
inflation responds negatively to monetary policy shock, but the responses are
heterogeneous across the middle-, luxury- and affordable-segments of the housing
market. The luxury-, large-middle- and medium-middle-segments are found to respond
much more than the small-middle- and the affordable-segments of the housing market.
More importantly, we find no evidence of the home price puzzle, observed previously by
other studies that analyzed house prices using small-scale models. We put this down to
the benefit gained from using a large information set.