The Cape of Good Homes: Exchange Rate Depreciations, Foreign Demand and House Prices

65 Pages Posted: 2 Apr 2019 Last revised: 3 Aug 2019

See all articles by Allan Davids

Allan Davids

University of Cape Town (UCT)

Co-Pierre Georg

Deutsche Bundesbank; University of Cape Town (UCT)

Date Written: August 1, 2019

Abstract

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

Davids, Allan and Georg, Co-Pierre, The Cape of Good Homes: Exchange Rate Depreciations, Foreign Demand and House Prices (August 1, 2019). Available at SSRN: https://ssrn.com/abstract=3349815 or http://dx.doi.org/10.2139/ssrn.3349815

Allan Davids (Contact Author)

University of Cape Town (UCT) ( email )

Private Bag X3
Rondebosch, Western Cape 7701
South Africa

Co-Pierre Georg

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

University of Cape Town (UCT) ( email )

Private Bag X3
Rondebosch, Western Cape 7701
South Africa

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