Residential property as a hedge against inflation in South Africa.

Abstract

The empirical evidence regarding the magnitude of the relationship between inflation and residential property has had conflicting results. Although the issue of inflation-hedging has been discussed by multiple authors, the results have been inconsistent with regard to the ability of property to act as a hedge against inflation. This topic has been explored largely in an international context, with limited studies on South African grounds. Over the years the topic of inflation-hedging has been examined using multiple cointegration techniques, which have been adapted over the years to accommodate various limitations. The conventional Autoregressive Distributive Lag (ARDL) model has been a solid model for the purpose of this topic as it has proven to have various advantages over other models. However, this model assumes linearity and symmetry with regard to the relationship. In order to overcome the limitations of this model, the Nonlinear Autoregressive Distributive Lag (NARDL) model was developed, as it accounts for possible asymmetric adjustment. Both these models were employed for the purpose of this study with the intent of determining whether the relationship between the variables is nonlinear and asymmetric. This study utilized quarterly data for a 30-year time period from 1989-2019, a period which was extremely relevant in the context of South African history, because of the transition period from the apartheid regime. The data chosen for the inflation rate is represented by the consumer price index (CPI) and housing prices was represented by both the housing price index (HPI), as well as segmented housing prices. The results from this study confirmed that property is able to hedge against inflation, with strong evidence supporting the existence of an asymmetric relationship between the variables. All segments were confirmed to effectively hedge against inflation, with only the affordable segment being a partial hedge for the purpose of the NARDL model. Evidence of asymmetry was confirmed, indicating that when inflation increases, housing prices increase at a rate greater than unity. However, in periods of decreasing inflation, the increase in absolute value is far greater. Investors can, therefore, profit off investing in property during all inflationary periods, and generate greater wealth in periods of decreased inflation.