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Household Wealth Accumulation and Portfolio Choices in Korea

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  • Sang-Wook Stanley Cho

    ()
    (School of Economics, The University of New South Wales)

Abstract

This paper constructs a quantitative lifecycle model with uninsurable labor income and aggregate housing return risk to assess how Korean households make saving and portfolio allocation decisions. The model incorporates the special roles housing plays in the portfolio of households: collateral, a source of service flows, as well as a source of potential capital gains or losses. In the model, a household first makes the decision whether to rent or to buy a house and then chooses the housing value. The model adds to existing models of wealth accumulation some unique institutional features present in Korea, namely the rental system (`chonsae') and the lack of a mortgage system. When the model is calibrated to match the Korean economy, several key features of the data are better able to be reproduced. The paper also analyzes the role of institutional features by comparing several alternative housing market arrangements and the introduction of a pay-as-you-go social security system to assess their impact on wealth accumulation, portfolio choices, and the pattern of homeownership. I find that expanding the mortgage system significantly increases the homeownership ratio, while alternative rental arrangements have mixed effects on the homeownership ratio. All of the alternative market arrangements raise the fraction of household wealth invested into housing assets. I also find that the introduction of social security system will lower the overall savings in Korea by approximately 10% and lower the homeownership ratio by 6 percentage points.

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File URL: http://wwwdocs.fce.unsw.edu.au/economics/Research/WorkingPapers/2007_26.pdf
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Bibliographic Info

Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2007-26.

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Length: 45 pages
Date of creation: Aug 2007
Date of revision:
Handle: RePEc:swe:wpaper:2007-26

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Keywords: Lifecycle model; Consumption; Wealth; Housing; Korea;

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Citations

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Cited by:
  1. Sang-Wook Stanley Cho & Johanna Francis, 2008. "Tax Treatment of Owner Occupied Housing and Wealth Inequality," Fordham Economics Discussion Paper Series dp2008-17, Fordham University, Department of Economics.
  2. Kim, Jinwon, 2013. "Financial repression and housing investment: An analysis of the Korean chonsei," Journal of Housing Economics, Elsevier, vol. 22(4), pages 338-358.

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