The Time-Varying Effect of Interest Rates on Housing Prices

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.

Automated summary

This study analyzes the time-varying effect of interest rates on housing prices, finding that in Korea, the impact of interest rate shocks on housing prices increased significantly after the global financial crisis and reached its peak during the period of rising house prices from 2020 to 2021. This increasing impact is attributed to the increased dependence on loans for housing purchases.