Dynamics of House Prices and Bank Lending in Korea

This chapter studies the dynamics of house prices between the two Korean housing submarkets, a premium market of Kangnam area in Seoul and other provincial markets, and addresses the correlation between house prices, bank lending, and other macroeconomic factors such as income and interest rate during the study period (1999-2011). Unlike the previous literature, this study focuses on the exact effect of bank lending on the dynamics of the apartment house prices in the long- and short-run analysis by considering the seasonal adjustment for the dependent and independent variables both.The empirical results show that the house prices of Kangnam area as a premium market in Korea is positively influenced by bank lending in the long run as the house prices are in other provincial markets in our study. However, in our short-run analysis, the house prices in the premium market are negatively influenced by bank lending, while it has no significant impact on the house prices of other provincial markets in general. The income growth is shown not to cause the apartment housing price to rise significantly over periods in the long run, suggesting that a government policy stabilizing the housing prices through a change in real income may not have significant consequences as expected. However, a temporary change in real income seems to have positive impact on house prices in the very short-run period over all regions of Korea.