The Effect of Housing Price Changes on Household Debt: An Overlapping Generations Model Approach (in Korean)

In Korea, household debt and housing prices have shown concurrent upward trends over the past ten years until the recent global financial crisis. However, housing prices have been stabilized after the crisis, especially in the metropolitan area, and downward adjustments are more likely in the future because of the macroeconomic factors like ageing population. Considering such foreseeable macroeconomic changes, it is quite natural to ask if the persistent rise in household debt as now is sustainable. Thus, this paper attempts to evaluate the long-term effects of the changes in the macroeconomic environments such as downward adjustment in housing prices or ageing population on the level of household debt, through simulation based on an overlapping generations model. Through this, the paper tries to shed some lights on the sustainability of household debt in indirect way. It is noteworthy that the model we use in the simulations is adjusted to reflect the aggregate and cross-sectional features of Korean households as much as possible. The simulation results show that the equilibrium debt-income ratio decreases by 9.6%p from the baseline scenario (current path) in ten years when real housing prices drop permanently by about 10% over five years. The debt-income ratio declines further by 16.8%p from the baseline when we also take population ageing into account. The result means that the household debt to income ratio, which stands at 143% in 2009, has to decrease to 110%∼123% in the mid- to long-run.