| Summary: | The 2007-2008 US subprime mortgage crisis evolved into a financial crisis that
negatively affected many economies in the world and therefore it was widely referred to
as the global financial crisis. Since the beginning of this financial crisis of 2008-2009,
South Africa experienced a significant increase in its household debt to income ratio. In
the main, the aim of this dissertation is to investigate the prominent factors contributing
to the rise in the level of household debt in South Africa. Also, we study the response of
household debt to various shocks originating from the aforementioned crisis.
Additionally, in the context of our timeline (1985 Q1-2012 Q1) we will extrapolate
possible graphical trends in the rise and fall of household indebtedness in South Africa
associated with various crises. Working from past research papers and a theoretical
framework developed by Franco Modigliani and Milton Friedman, seven
macroeconomic variables will be considered to examine the rise of household borrowing
to income namely; the real house price index, consumer price index. real income, real
prime rate, real household consumption expenditure, real gross domestic product and real
household savings. Both a long-run cointegration analysis and a short-run error
correction model will be used to evaluate the relationship between household debt and
the chosen variables by estimating a Vector Error Correction Model. Furthermore, the
Variance Decomposition and the Generalized Impulse Response Function will be
utilized to assess the impact of household debt to various shocks emanating from the
2008-2009 financial crisis. The different models and tests conducted in this research will
be executed using the statistical software package EVIEWS 7. Based on the results,
household debt was seen to have been fairly affected by the 2008-2009 financial crisis.
The cointegration analysis maintains that in the long run, household borrowing is
positively and significantly determined by consumer price index and real household
consumption. In addition, it confirms that household borrowing is negatively affected by
real household income and real GOP. The rest of the variables were found insignificant.
Nevertheless, the short run error correction model reveals that about 3.6% of the
disequilibrium will be corrected each quarter for the equilibrium state to be restored.
Also, the Variance Decomposition results confirmed that the South African household
debt is mostly affected by shocks from real house price index, real household income,
real household consumption and real household savings, respectively. Furthermore, the Generalized Impulse Response Function results established the significant positive
response of household debt to a shock from real house price index and real household
consumption. The response of debt to shocks from consumer price index, real household
savings and real income is negative and this outcome is confirmed by the theory.
However, the response of debt shows fluctuating behaviours to shocks from LRIN,
LRPR and LRGDP over the estimated period.
In conclusion, our econometric investigation highlighted the main causes of the high
levels of household debt in South Africa both in the short and long run. The Generalized
Impulse Response Functions confirm that shocks like the occurrence of the 2007-2008
financial crisis will have a significant impact on real house price index, consumer price
index, real household consumption and real household savings. The Engle granger
results show that there exist no significant relationship between household debt and
unemployment in South Africa over the period 1980 to 2010. However, we propose that
this result may have been significant if quarterly unemployment data was available and
included in the main data set. Finally, based on the stability, validity and reliability of
our model, we recommend its use to facilitate policy analysis and decision making
regarding household debt levels in South Africa. === Thesis (M.Com.( Economics) North-West University, Mafikeng Campus, 2012
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