The Cape of Good Homes: Exchange Rate Depreciations, Foreign Demand and House Prices
65 Pages Posted: 2 Apr 2019 Last revised: 3 Aug 2019
Date Written: August 1, 2019
We study how foreign buyers in the housing market react to large local exchange rate depreciations and the subsequent impact on house prices using novel transaction level data for Cape Town, South Africa. Foreign purchases are more likely to be in cash and concentrate in luxury suburbs. Foreign buyers pay higher prices and realize lower capital gains than locals. These cannot be explained by differences in property characteristics, how buyers choose to finance their purchases, or market timing. Using historically large depreciations as positive shocks to foreign non-resident demand, we find that areas with a large pre-existing population of foreign born residents experience quality-adjusted price increases relative to other geographically close areas in the month following the depreciations. These effects are larger and more precisely estimated in more affluent areas.
Keywords: foreign housing demand, exchange rates, house prices
JEL Classification: R21, F31, G11
Suggested Citation: Suggested Citation