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보고서
2022 Apr/05
Tightening Financial Conditions and Implications for the Housing Market in Korea Issue Papers 22-05 PDF
Jung, Whayoung
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Summary
In the aftermath of the Covid-19 pandemic, housing prices have soared amid a rapid increase in household debt stemming from rising housing loans. This has raised concerns about financial imbalances in the housing market. In the meantime, as central banks of major economies normalize their monetary policy due to inflationary concerns, the housing market may be affected by the change in financial conditions. Against this backdrop, this article intends to examine the impact of tightening financial conditions on the housing market and present relevant implications.  

This article analyzes the effect of changes in interest rates and household loans on housing price growth. As shown in the analysis, an increase in the base rate contributes to reducing price rises across the housing market. Since the market responds to rate hikes gradually with time, however, household loans are likely to have a bigger impact on housing prices for the short term, compared to interest rates. In an analysis of upside and downside risks to housing prices, the upside risk has increased considerably since the pandemic, driven by a steep rise in household lending and upward price dynamics. In particular, the recent realized growth rate of housing price is close to the right tail (upside risk) of its conditional distribution, suggesting signs of overheating in the market. 

Considering the growing uncertainty of the housing market, as evidenced by a surge in the upside risk to housing prices, household loans need to be actively dealt with to curb rocketing housing prices in the short-term. In the long run, Bank of Korea’s policy stance to raise interest rates is expected to put downward pressure on housing prices. Considering the ripple effects of rate hikes, gradual normalization of stricter household loan regulations would be needed in the long-term.