Circulating and Casual Relationship between Housing Business Cycle and Construction Business Cycle

Abstract

The analyses of circulating and causal relationship between the housing and the construction business cycles were conducted by using the HP filter and impulse response analysis and variance decomposition analysis using the VAR model on variables representing the South Korean housing and construction market and macroeconomic variables for a period from 1986 to 2017. The results show that the average business cycle length was found to be around 5~6 years, with the period of expansion being 1.3~1.5 times longer than that of recession, in the housing market and approximately 6~7 years in the construction industry. And while the amplitude is ever decreasing. those of rental prices, apartment prices, Seoul prices and construction orders were found to relatively large. The leading and lagging relationship of variables were analyzed in the following order: interest rate → GDP → housing price → construction order → construction investment, and the interest rate had a significant influence in the negative (-) direction on all variables. These findings point to the availability that a market mechanism is in operation, which helps economic players including the government obtain information and execute actions more accurately and quickly than in the past. Also, the government’s policy to focus on the risk variables, which are relatively bigger amplitudes, will be more effective. It also suggests that the construction market can be predicted to a certain extent through the current cyclical phase of the housing market and it is necessary to respond very sensitively to interest rate fluctuations.