Housing Speculation and Housing Price Bubble in Korea
31 Pages Posted: 27 Apr 2004
Date Written: February 2004
One of the major social and economic problems in Korea in recent years has been and is the sustained housing price spiral, especially since 2000. In Seoul, the ratio of housing price to household annual income is about 10 times. This is three or four times higher than the corresponding ratios in advanced countries. To make the matter worse, the housing price continues to rise rapidly; in large cities including Seoul; it has been increasing by more twenty per cent per year lately. The excessively high housing price means worsening housing affordability, higher wage rate and worker's weakening desire to work. It is a common belief in Korea that the chief reason for such a high housing price is speculation and the government has applied a series of anti-speculative measures including major increase in capital gains tax and property tax. However, these measures have not produced the expected results. Another controversial issue has been the presence of bubbles in housing price and its impact on the economy. It goes without saying that the bubble is caused by speculative activities.
This paper is designed on one hand to evaluate the contribution of speculative activities to housing price hike and, on the other to verify the presence of bubble in housing price. In order to quantify the impact of speculation on housing price, a simple devise is applied; the value of the explained variation of housing price resulting from a regression analysis is decomposed into the percentage share of each independent variable including the variable for speculation. The presence of bubble is verified through three estimation methods: the long-run equilibrium price approach, the fundamental market value approach and the price-income ratio approach.
This study has produced a set of interesting findings. First, speculative demand has, in Gangnam District, one of the most speculative areas in Seoul, an impact on housing price as much as five times the normal housing demand. Second, there are indeed bubbles in housing price, but their magnitudes differ somewhat depending upon the estimation methods. Third, the fear that the bust of bubbles might lead to general economic collapse in Korea does not seem to be well founded; the problems of bubble in Korea appears to be much less serious than those of bubbles in Japan in the 80s and 90s. Fourth, the best way of fighting speculation is not the sudden increase in capital gains tax or any other drastic anti-speculative measures, but orderly and sustained increase in the supply of housing.
Keywords: housing speculation, housing price hike, housing price bubble
JEL Classification: C22, R21, R31
Suggested Citation: Suggested Citation