An analysis from the Bank of Korea indicated that expectations for rising housing prices lead to increases in housing prices and household debt. Based on this, the Bank of Korea argued that macroprudential policies should be strengthened to prevent interest rate cuts from stimulating expectations for housing price increases.
On the 15th, the Bank of Korea published a BOK issue note titled "Characteristics and Implications of Housing Price Expectations." Three individuals participated in the report's preparation: Lee Jae-won, the head of the Economic Research Institute and chief economist at the Bank of Korea; Hwang In-do, director of the Financial and Monetary Research Office; and Kim Woo-seok, a research officer.
The research team analyzed the characteristics and ripple effects of housing price expectations based on a consumer sentiment index (CSI) that estimates housing prices monthly. The CSI index hit a low of 99 in February this year and rose to 111 last month following a trend of interest rate cuts.
Housing price expectations were shown to have significant fluctuations over a relatively short period. Additionally, once formed, the expectations tended to be maintained for a long time. It was found that the actual expectations were reflected in the rate of increase in housing prices with an approximately eight-month lag.
The formation of expectations was analyzed to be influenced by levels of other economic variables such as industrial production, stock prices, interest rates, and construction starts. Furthermore, it was confirmed that the increase in actual household loans following a rise in expectations exceeded the increase in industrial production. This indicates that expectations lead to excessive borrowing.
To quantitatively assess the impact of housing price expectations on actual housing prices and household debt, the research team conducted a counterfactual scenario analysis assuming that expectations were maintained at the neutral level of April 2020 from May 2020 to May 2022, a period of soaring housing prices.
The analysis revealed that as of May 2022, the increase in housing prices was only 11%, which is half of the actual increase of 24%. The increase in the household loan ratio relative to gross domestic product (GDP) was also estimated to be 4.9 percentage points, less than the actual increase of 7.6 percentage points. This implies that if housing price expectations are properly managed, the rate of increase in housing prices could be limited.
The research team also analyzed that interest rate cuts could stimulate housing price expectations in the short term. The stimulating effect was found to be more pronounced when macroprudential policies were also relaxed. In contrast, when regulations were tightened, the response to expectations appeared to be limited.
The research team argued that close cooperation between macroprudential policies is necessary to curb overheating of housing price expectations due to interest rate cuts. Macroprudential policies include strengthening regulations such as loan-to-value (LTV) ratios and debt service ratios (DSR).
The research team noted, "Since housing price expectations greatly affect actual prices and household debt, careful monitoring and management by policymakers is necessary," adding that "expectations could also be alleviated through measures such as expanding housing supply or curbing speculative demand."