 Fundamentals and rational bubbles in the Korean housing market: A modified present-value approachJan R. Kim and Gieyoung Lim Economic Modelling, 2016, vol. 59, issue C, 174-181 Abstract: This paper employs the present-value approach to examine the dynamics of the Korean housing market. To capture the large swing in the price-rent ratio accompanied by intermittent ups and downs, we incorporate a periodically collapsing bubble in an otherwise standard present value model. We then decompose the movements in the actual price-rent ratio into those explained by the expectations of housing market fundamentals (i.e., the rent growth, risk-free interest rate, and excess returns from housing investment) and the bubble. The bubble part set aside, most of the variations in the price-rent ratio are explained by the expected risk premium of housing investment, whereas the expected real interest rate and rent growth account for relatively small fractions of the variations. It is also found that the bubble has continuously accumulated since the early 2000s, reaching as high as 51% of the house price around the end of 2014. Finally, the recent increases in house price over 2007–2014 are likely to have been driven by self-fulfilling expectations typical of a bubble. Keywords: Present value model; Price-rent ratio; Fundamentals; Periodically collapsing bubble; Korean housing market (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:59:y:2016:i:c:p:174-181 DOI: 10.1016/j.econmod.2016.07.015 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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