Motivated by concerns that a speculative price bubble may have formed in the South African house market, this paper examines South African house-price dynamics over a three-decade period spanning 1976 to 2005. Estimation of error-correction models reveals that real changes in the prices of medium- and large-sized South African homes are associated with short-run changes in economic growth, real mortgage rates and sovereign risk. Empirical analysis suggests that the real prices of small-sized homes are not associated with real mortgage rates in the short run. Estimation of the house-price models also revealed that property prices exhibit mean reversion in the long run, although adjustment to long-run equilibrium (governed by economic growth, real mortgage rates and sovereign risk) is slow.
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