Interest Rate, Inflation, and Housing Price: With an Emphasis on Chonsei Price in Korea
This paper discusses the relationship between interest rate and inflation rate on one part and the house price relative to chonsei price (up-front lump-sum deposit from the tenant to the owner for the use of the property with no additional requirement for periodic rent payments) on the other. The key point of the paper is that the relative price of sales to chonsei depends on the ratio of inflation to real interest rate, and thus even when the monetary authority maintains a pre-announced target level of inflation rate, the relative price of sales to chonsei rises if the real interest rate is lowered. This finding seems to help understand the recent hikes of the house prices despite the stabilizing chonsei prices. Recognizing this relationship, it may be sensible to lower the target inflation rate in an economy where real interest rates permanently decline, if the society wishes to reduce its adverse effect on the wealth distribution between house owners and chonsei tenants.
|Date of creation:||Jan 2005|
|Date of revision:|
|Publication status:||published as Cho, Deokho and Seugryul Ma. "Dynamic Relationship Between Housing Values And Interest Rats In The Korean Housing Market," Journal of Real Estate Finance and Economics, 2006, v32(2,Mar), 169-184.|
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