Shocks and household debt in South Africa: A variance decomposition and GIRF analysis

Abstract

A crucial boost in the household debt to income ratio was experienced among South African households since the incident of the 2007-2008 US subprime mortgage crisis which later plummeted into the 2008-2009 financial crisis. The key focus of this paper is to investigate how the South African household debt might respond to shocks over a significant time horizon. We analysed the data of seven real macroeconomic variables from 1985 Q1 to 2012 Q1. The Variance Decomposition and the Generalized Impulse Response Function analyses are respectively utilized over a time horizon of five years (20 quarters) to investigate the contributions of each variable in explaining the variation in household debt levels and to assess the impact of household debt to various shocks. The statistical software package EViews 7 is used to conduct the variety of tests used in this study. The outcome of the Variance Decomposition reveals that disparities in the level of household debt in South Africa can be mostly elucidated by contributions in house prices, household income, gross domestic product and prime rate. Vis-à-vis the GIRF analysis, the outcome supports the findings of a significant positive response of household debt to a shock from house prices and household consumption. These outcomes reflect the expectations from the theory of the life cycle hypothesis. In regards to the accuracy and consistency of our analysis, we support its use to assist decision making vis-à-vis lowering household debt levels in the South African economy.