What causes house prices to fluctuate? Evidence from South Korea

Abstract

In this study, we build a structural vector autoregressive model of the housing market with supply and demand shocks to determine the main causes of house price movements in South Korea. We include housing permits, basic housing demand, and the growth rates of real housing prices in the model. Changes in house prices are decomposed into three structural components: housing supply shocks, shocks to basic housing demand, and shocks to housing market-specific demand. We find that the main driver of the movements in house prices is housing market-specific demand shocks, and these are associated with beliefs regarding future house prices and the real estate market, as measured by the Consumer Sentiment Indices for the housing market, rather than credit conditions or financial variables such as interest rates or stock returns.