Analysis for the Asymmetric Adjustment between Rent to Jeonse Ratio and Market Interest Rates

According to recent studies most of economic variables could experience asymmetric adjustments if the possible influences such as transaction costs, market frictions and asymmetric information fails to maintain equilibrium. In particular, asymmetric adjustments could be seen in the case of borrowing costs between lessors and tenants on Jeonse and monthly rent markets. On that account, this study examines whether any asymmetric adjustment exists between rent to Jeonse ratio and market interest rates. This study uses residuals estimated by the DOLS model and infers the asymmetric error correction model by Enders and Siklos. This study also used 3-year rates of treasury bonds provided by the Bank of Korea, interests on mortgage loans and rent to Jeonse ratio provided by the Korea Real State Board as market interest rates. The sample period ranges from January 2011 to August 2023. The results from the threshold autoregressive and the momentum threshold autoregressive models indicates that cointegration exists between rent to Jeonse ratio and market interest rates, which is verified by recent studies, and the long-term relationship between them have different speed of convergence to equilibrium from signs or sizes of deviations. In addition, the estimation results from the asymmetric error correction model shows that the higher the change in cointegration residuals is, the faster the adjustment is. Participants who believe that larger separation between 3-year rates of treasury bonds and rent to Jeonse ratio can offset trading costs increase, which makes the speed of the conversion rates faster. The results explains the imbalance between Jeonse and monthly rent caused by market interest rates. Policymakers should be interested in the direction or speed of market interest rates for Jeonse and monthly rent.