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Price Run-up in Housing Markets, Access to Bank Lending and House Prices in Korea

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Abstract

This paper studies the causal relationship between house prices and the access to bank lending in Kangnam, the hottest submarket in Seoul and four ‘cold’ markets which have shown relatively modest price increases. In response to the rapid escalation of house prices in Seoul, primarily in Kangnam in recent years, the Korean government implemented a number of policies to stabilize house prices. In particular, it introduced more strict limits on loan-to-value ratio and debt-to-income ratio as part of the mortgage loan qualification process in order to restrict the availability of bank lending for the housing market. The short-run influence of the bank lending on the apartment prices is clearly present in ‘cold’ markets, while it is not in Kangnam, the ‘hot’ market, even though the long-run influence is stronger in Kangnam than in the other markets. This result holds for the entire sample period (1999–2006) as well as for the subperiods before and after the introduction of lending restrictions in August, 2005. It also holds for Kangnam and Kangbuk for an extended period of 1988 to 2006. Our results suggest that in the short run the lending restriction may cause a disruption in untargeted housing markets while it has little influence on the apartment prices in the targeted market. We also find that banks have adjusted the bank lending in response to changes in the house prices in Kangnam as well as in the other markets.

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Notes

  1. For a comprehensive review of the most recent price run-up in the OECD countries, refer to Girouard et al. (2006).

  2. Apartments are units in a high rise condominium complex.

  3. Apartments account for 52.6% of all housing stock and 58.2% of the housing stock in the capital region according to the 2005 Housing Survey by Korean Research Institute of Human Settlement.

  4. The Kookmin Bank tabulates the official real estate price indices for the Korean government.

  5. The result we obtain using the Real Estate Bank data is more or less the same as the result we obtain using the Kookmin Bank data. With the ‘aggregated’ Kookmin Bank time series, we find that the short-run impact of bank lending on house price is much smaller in Kangnam than in ‘cold’ markets; with the disaggregated data, we find that the short-run impact of bank lending on house price is statistically insignificant in Kangnam while it is clearly present in ‘cold’ markets.

  6. In the recent past the Korean residential house prices went through four significant periods: (1) a boom from 1986 to 1991; (2) a stable period for 1991–1997; (3) a collapse in 1997–1998; (4) a boom for 1999–2006. The East Asian financial crisis caused a dramatic decrease in housing transactions, a contraction of the housing industries and the fall in the house prices for 1997–1998.

  7. For a brief review of the history of the Korean mortgage market, see Kim (2004), Zhu (2006) and Hwang et al. (2006).

  8. The data are from the Statistical Survey of the Bank of Korea. Important reasons for the shift from the corporate sector to the households are that the corporate demand for funds shrank due to the sluggish economy and that banks became more hesitant to make loans to corporations since they suffered heavy losses from the corporate loan portfolio during the East Asian financial crisis.

  9. In April 2004, the government also introduced the transaction price disclosure requirement and some limitation in sales of apartments yet to be built in order to slow down the apartment price run-up.

  10. Refer to Appendix 1 for a chronology of the major policy interventions in Korea.

  11. For a fuller discussion, refer to Ambrose and Kim (2003) and Hwang et al. (2006).

  12. Since P/R ratio = (house price)/(yearly rent), expressing yearly rental as (chonsei) times (prevailing chonsei equivalent annual interest rate), we have P/R ratio = (house price/chonsei)(1/prevailing chonsei equivalent annual interest rate).

  13. For the purpose, we use the database found in www.kinds.or.kr, which archives the articles published in the major Korean newspapers with nationwide circulation. The database covers eight newspapers until October 22, 2003 and nine newspapers thereafter.

  14. For both Kangnam and Kangbuk we used the total bank lending in Seoul rather than that in Kangnam or Kangbuk since the total bank lending in Kangnam or Kangbuk is not available and also because households moving into Kangnam or Kangbuk may arrange house purchase loans elsewhere in Seoul.

  15. We estimate the augmented vector error correction model for the apartment price using mortgage loans and report the results in Table 11.

  16. Akaike information criterion (AIC), Schwarz information criterion (SIC) and Hannan–Quinn information criterion (HQ) are used for model selection such as determining the lag length of VAR.

  17. See Goodhart and Hofmann (2003) and Gerlach and Peng (2005)

  18. While we would have to use 12 lags to control for the month fixed effects, we cannot use the 12 month lag due to the short times series we have available for the analysis. We find a shorter lag such as four lags is able to capture most of the lagged effects.

  19. We use the value weighted returns of all Korea Stock and Futures Exchange (KRX) stocks, the first difference of interest rates and the first four lags of the apartment prices as instrument variables.

  20. According to a survey by the Kookmin Bank, as high as 59% of apartments in Kangnam were priced higher than the threshold of 600 million won as of August, 2005.

  21. Iacoviello (2004) estimates that the fraction of consumption by constrained households in the US is between 0.18 and 0.26.

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Authors and Affiliations

  1. Department of Business Administration, Changwon National University, Changwon, South Korea

    Sae Woon Park & Doo Woan Bahng

  2. Department of Finance, California State University-Fullerton, Fullerton, USA

    Yun W. Park

  3. Korea Securities Research Institute, 45-2 Yoido-dong, Youngdeungpo-gu, Seoul, 150-974, South Korea

    Yun W. Park

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  1. Sae Woon Park
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  2. Doo Woan Bahng
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Correspondence to Yun W. Park.

Additional information

We thank the referees for their insightful comments, which improved the paper immeasurably. We also thank the Kookmin Bank for providing us with valuable data.

Appendices

Appendix 1

Table 17 Major policy interventions on the housing markets in Korea
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Appendix 2

Table 18 Data descriptions and sources
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Park, S.W., Bahng, D.W. & Park, Y.W. Price Run-up in Housing Markets, Access to Bank Lending and House Prices in Korea. J Real Estate Finan Econ 40, 332–367 (2010). https://doi.org/10.1007/s11146-008-9143-1

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