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

63 Pages Posted: 2 Apr 2019 Last revised: 1 Jun 2020

See all articles by Allan Davids

Allan Davids

University of Cape Town (UCT)

Co-Pierre Georg

University of Cape Town; Deutsche Bundesbank

Date Written: May 30, 2020

Abstract

Emerging markets are characterized by frequent periods of large and unexpected exchange rate depreciations. These events create opportunities for foreign investors to purchase domestic assets at a discount, especially if these assets have sticky prices. We show this to be the case in the housing market in Cape Town, South Africa. Using property transaction data, we find that foreign non-residents buy more properties following large exchange rate depreciations—in the lower quartile of month-on-month changes. We find no evidence of a similar effect for other buyers, suggestive of strong exchange rate-related motives. Using these depreciations as demand shocks to foreign non-resident buyers, we find that this increased demand leads to an increase in house prices of 3.39%. We find that foreign non-resident buyers pay 10.42% more than other buyers for otherwise identical properties and that this tendency to pay a premium accounts for around 27% of the observed causal impact of foreign demand on house prices.

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 (May 30, 2020). 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

University of Cape Town ( email )

Private Bag X3
Rondebosch, Western Cape 7701
South Africa

Deutsche Bundesbank ( email )

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

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