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The Time-Varying Effect of Interest Rates on Housing Prices

Author

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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)

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.

Suggested Citation

  • Cheonjae Lee & Jinbaek Park, 2022. "The Time-Varying Effect of Interest Rates on Housing Prices," Land, MDPI, vol. 11(12), pages 1-16, December.
    • Handle: RePEc:gam:jlands:v:11:y:2022:i:12:p:2296-:d:1003388
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    References listed on IDEAS

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    1. Giorgio E. Primiceri, 2005. "Time Varying Structural Vector Autoregressions and Monetary Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(3), pages 821-852.
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    Cited by:

    1. Kyungbo Park & Hangook Kim & Jeonghwa Cha, 2023. "An Exploratory Study on the Development of a Crisis Index: Focusing on South Korea’s Petroleum Industry," Energies, MDPI, vol. 16(14), pages 1-24, July.
    2. Zarul Azhar Nasir & Noormahayu Mohd Nasir & Muhammad Adidinizar Zia Ahmad Kusairee & Siti Nur’Amalina Syeddin & Nor Zarina Mohd Salim, 2023. "Evaluating the Nexus between Monetary Sector Variables and Housing Affordability in Malaysia," Information Management and Business Review, AMH International, vol. 15(4), pages 31-40.

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