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Fundamentals and rational bubbles in the Korean housing market: A modified present-value approach

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  • Kim, Jan R.
  • Lim, Gieyoung

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.

Suggested Citation

  • Kim, Jan R. & Lim, Gieyoung, 2016. "Fundamentals and rational bubbles in the Korean housing market: A modified present-value approach," Economic Modelling, Elsevier, vol. 59(C), pages 174-181.
    • Handle: RePEc:eee:ecmode:v:59:y:2016:i:c:p:174-181
    DOI: 10.1016/j.econmod.2016.07.015
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    Cited by:

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    2. Dettoni, Robinson & Gil-Alana, Luis Alberiko, 2023. "Testing the hypothesis of duration dependence in the U.S. housing market," Finance Research Letters, Elsevier, vol. 58(PD).
    3. Geoffrey Poitras & Giovanna Zanotti, 2018. "Housing Market Bubbles and Mortgage Contract Design: Implications for Mortgage Lenders and Households," JRFM, MDPI, vol. 11(3), pages 1-18, July.
    4. Kyungwon Kim & Jae Wook Song, 2020. "Detecting Possible Reduction of the Housing Bubble in Korea for Different Residential Types and Regions," Sustainability, MDPI, vol. 12(3), pages 1-31, February.
    5. Insoo Baek & Sanghyo Lee & Joosung Lee & Jaejun Kim, 2021. "Analysis of Housing Market Dynamics Considering the Structural Characteristics of Mortgage Interest," Sustainability, MDPI, vol. 13(19), pages 1-15, September.
    6. Kang, Sang Hoon & Uddin, Gazi Salah & Ahmed, Ali & Yoon, Seong-Min, 2018. "Multi-scale causality and extreme tail inter-dependence among housing prices," Economic Modelling, Elsevier, vol. 70(C), pages 301-309.
    7. So Jung Hwang & Hyunduk Suh, 2021. "Analyzing Dynamic Connectedness in Korean Housing Markets," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 57(2), pages 591-609, January.
    8. Gil-Alana, Luis Alberiko & Dettoni, Robinson & Costamagna, Rodrigo & Valenzuela, Mario, 2019. "Rational bubbles in the real housing stock market: Empirical evidence from Santiago de Chile," Research in International Business and Finance, Elsevier, vol. 49(C), pages 269-281.

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    More about this item

    Keywords

    Present value model; Price-rent ratio; Fundamentals; Periodically collapsing bubble; Korean housing market;
    All these keywords.

    JEL classification:

    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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