The Time-Varying Effect of Interest Rates on Housing Prices

Cheonjae Lee and Jinbaek Park ()
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Cheonjae Lee: Global Development Partnership Center, Korea Research Institute for Human Settlements (KRIHS), 5 Gukchaegyeonguwon-ro, Sejong-si 30147, Republic of Korea
Jinbaek Park: Real Estate Market Research Center, Korea Research Institute for Human Settlements (KRIHS), 5 Gukchaegyeonguwon-ro, Sejong-si 30147, Republic of Korea

Land, 2022, vol. 11, issue 12, 1-16

Abstract: This study analyzes the time-varying effect of interest rates on housing prices. As housing prices are too high for most consumers to afford with income alone, they use bank loans. Consequently, when interest rates fall, the demand for housing increases, causing prices to rise. This effect of interest rates was common in countries that implemented low-interest rates in response to the COVID-19 pandemic. Using Korean data from March 1991 to March 2022, this study examined the impact of interest rate shocks on housing prices by employing a time-varying parameter vector autoregressive model. According to the analysis, in Korea, while the impact of the interest rate shocks on housing prices was not significant before the global financial crisis, it increased dramatically afterward. Particularly, the impact of interest rate shocks was strongest relative to the past during the period of the increase in house prices from 2020 to 2021. The rise in the effects of interest rate shocks on housing prices is attributed to the increased dependence on loans for housing purchases. The results suggest that given the recent substantial increments in interest rates due to inflation, an interest rate shock would likely cause a global housing market recession.

Keywords: housing prices; interest rate; time-varying effect; real estate market; TVP-VAR (time-varying parameter vector autoregressive model) (search for similar items in EconPapers)
JEL-codes: Q15 Q2 Q24 Q28 Q5 R14 R52 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:gam:jlands:v:11:y:2022:i:12:p:2296-:d:1003388

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