Curbing the Rising House Prices: The Effect of Demand and Supply Policies on House Prices from a Perspective of the Timing of Policy Implementation

This paper estimates the effect of the governmental announcement of demand restrictions and supply of new homes on house prices and investigates how the timing of policy implementation affects the impact of these policies. Empirically, we show that demand restrictions paired with a moderate or moderately high level of new home supply lead to a decline in house prices, whereas implementing only either demand or supply policies could result in a further increase. A critical observation from our study is that a rapid rise in house prices often self-reinforces its upward momentum, which ultimately accelerates the rate of increase in price over time. Our event study model shows that governmental interventions in the housing market have a significant impact in breaking that trend. In particular, implementing demand and supply policies simultaneously created a greater downward pressure on house prices in areas with a higher level of speculative investments, suggesting effectiveness of using both types of policies in reducing speculation. As an excessive increase in house prices compared to income growth drives the income gap between homeowners and non-owners, our study results contribute to reducing income inequality by better informing policymakers of the effective policy tools from a perspective of the timing of policy implementation.