The Effect of Interest Rates on Housing Market

This paper analyzes the effects of interest rate change on the Korean housing market. We construct a VAR model comprising mortgage rate, housing price, and housing transaction volume. And we identify the interest rate shocks by means of sign restrictions, and analyze the effects with the help of impulse response functions and forecast error variance decompositions. Data covers the period from January 2008 to July 2017. The results of analysis are as follows: First, the short-term impact of interest rate shocks are found to be bigger on housing transaction volume than on housing price. If the mortgage rate rises 0.25%p, housing transaction volume declines up to 11.9~13.5% after two months, while housing price drop up to 1.3~1.7% after 4~5 months. Second, while the effects of a decline in housing transaction volume disappear after 6~8 months, the effects of a drop in housing price do not disappear. Third, in the long run, interest rate shocks account for 26.2~28.7% of housing price volatility, and 19.1~21.4% of variation in housing transaction volume, while housing market shocks account for 38.1~43.5% of mortgage rate volatility.