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Seoul Journal of Economics - Vol. 31 , No. 2
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Seoul Journal of Economics - Vol. 31, No. 2, pp. 157-193
Abbreviation: SJE
ISSN: 1225-0279 (Print)
Print publication date 30 May 2018
Received 14 Mar 2018 Revised 04 May 2018 Accepted 04 May 2018

Can Housing Prices be Justified by Economic Fundamentals? Evidence from Regional Housing Markets in Korea
Jan R. Kim ; Sungjin Cho
Jan R. Kim, Primary author, Professor, Department of International Economics and Law, Hankuk University of Foreign Studies, 270 Imun-dong Dongdaemun-gu Seoul, 130-791, South Korea, Tel: +82-2-2173-3225 (kjryoul@hufs.ac.kr)
Sungjin Cho, Corresponding author, Professor, School of Economics, Seoul National University, Room 208, Building 16, 1 Gwanak-ro, Gwanak-gu, Seoul 08826, South Korea (sungcho@snu.ac.kr)

Funding Information ▼

JEL Classification: G12, C13, C32

Abstract

In this study, we use a present-value approach to examine the dynamics of six regional housing markets in Korea. The large upswing in the price–rent ratio accompanied by intermittent ups and downs, which are typical features of the Korean housing market since the mid-1980s, is captured by a periodically collapsing bubble incorporated into an otherwise standard present-value model. The movements in the actual price–rent ratio are then decomposed into movements explained by the expectations of housing market fundamentals (i.e., rent growth, risk-free interest rate, and excess returns from housing investment) and the speculative bubble. In all the six regional markets, most of the variations in the fundamental part of the price–rent ratio are explained by the expected risk premium of housing investment and the expected risk-free returns, whereas the expected rent growth account for relatively small fractions of the variations. The bubble has continuously accumulated since the early 2000s in all the six regions and has reached as high as 70% of house price by the end of 2017.

Keywords: Regional housing markets, Fundamentals, Bubble, Present-value model
Acknowledgments

Research Grant from Hankuk University of Foreign Studies is gratefully acknowledged

Financial support from the Center for Distributive Justice in the Institute of Economic Research of Seoul National University is gratefully acknowledged.

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