Are there housing bubbles in South Africa? Evidence from SPSM-based panel KSS test with a Fourier function

Abstract

This study applies the panel KSS test with a Fourier function through the sequential panel selection method, proposed by Chortareas and Kapetanios (2009), to test whether housing bubbles exist in South Africa using the ratio of housing price to income in nine provinces (i.e., Eastern Cape, Free State, Gauteng, KwaZulu-Natal, Limpopo, Mpumalanga, North West, Northern Cape, and Western Cape). Whereas, other panel-based unit root tests are joint tests of a unit root for all members of a panel and are incapable of determining the mix of integrated of order zero (I(0)) series and integrated of order one (I(1)) series in a panel setting, the SPSM-based panel KSS with a Fourier function can clearly identify how many and which series in the panel are stationary processes by classifying a whole panel into a group of stationary and non-stationary series. The empirical results from several traditional panel-based, as well as standard pure time-series unit root tests indicate that house price/income ratios for the nine provinces studied here are either stationary or non-stationary. However, results from the SPSM-based panel KSS with a Fourier function unequivocally indicate that house price/income ratios are stationary for the nine provinces under study. These results indicate that housing bubbles do not exist in the nine provinces of South Africa. Our test results have important economic and policy implications for South Africa.