Can Housing Prices be Justified by Economic Fundamentals? Evidence from Regional Housing Markets in Korea
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초록
In this study, we use a present-value approach to examine thedynamics of six regional housing markets in Korea. The largeupswing in the price–rent ratio accompanied by intermittent upsand downs, which are typical features of the Korean housing marketsince the mid-1980s, is captured by a periodically collapsing bubbleincorporated into an otherwise standard present-value model. Themovements in the actual price–rent ratio are then decomposedinto movements explained by the expectations of housing marketfundamentals (i.e., rent growth, risk-free interest rate, and excessreturns from housing investment) and the speculative bubble. In allthe six regional markets, most of the variations in the fundamentalpart of the price–rent ratio are explained by the expected riskpremium of housing investment and the expected risk-freereturns, whereas the expected rent growth account for relativelysmall fractions of the variations. The bubble has continuouslyaccumulated since the early 2000s in all the six regions and hasreached as high as 70% of house price by the end of 2017.
Abstract
In this study, we use a present-value approach to examine thedynamics of six regional housing markets in Korea. The largeupswing in the price–rent ratio accompanied by intermittent upsand downs, which are typical features of the Korean housing marketsince the mid-1980s, is captured by a periodically collapsing bubbleincorporated into an otherwise standard present-value model. Themovements in the actual price–rent ratio are then decomposedinto movements explained by the expectations of housing marketfundamentals (i.e., rent growth, risk-free interest rate, and excessreturns from housing investment) and the speculative bubble. In allthe six regional markets, most of the variations in the fundamentalpart of the price–rent ratio are explained by the expected riskpremium of housing investment and the expected risk-freereturns, whereas the expected rent growth account for relativelysmall fractions of the variations. The bubble has continuouslyaccumulated since the early 2000s in all the six regions and hasreached as high as 70% of house price by the end of 2017.
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