Chapter 1. Introduction

Transcription

1 Chaper 1. Inroducion Jeonse 1 is one of he mos popular housing renal conracs in Korea and is no found elsewhere in he world. The Jeonse sysem is key o achieving an in-deph undersanding of he Korean housing marke. In he pas few years, he Jeonse conrac has rapidly wihdrawn from commercial circulaion. Simulaneously, Jeonse house purchase prices have increased. The Korean Governmen is aemping o sabilize he Jeonse price o improve housing securiy for he Korean people. However, sudies focusing on he Jeonse price are lacking. To dae, he exac origin of he Jeonse sysem remains unknown. However, Jeonse was menioned in a Social Cusoms Repor wrien by a governor-general of he Chosen 2 in 1910: "Jeonse is he mos popular housing renal conrac in Chosen. 3 Thus, he Jeonse sysem was already in operaion approximaely 100 years ago. Jeonse is a housing renal conrac unique o Korea. Essenially, i is a repurchase agreemen(repo) in which he landlord borrows from he enan wih he house as collaeral 4. The enan pays he amoun of 50 percen or 70 o 80 percen o he house owner, and he landlord grans he enan he righ of occupaion. A he erminaion dae, he enan reurns he house, and he landlord repays he exac iniial nominal amoun of money o he enan. In he inerim period, no cash paymens are made by boh paries 5. Thus, he Jeonse sysem is considered no only a housing lease conrac 1 Jeonse is also spelled Chonsei 2 The Japanese Governor-General of Korea served as he chief adminisraor of he Japanese governmen in Korea while i was held as he Japanese colony of Chosen from 1910 o Sources: governor-general of he Chosen Social Cusoms Repor, 1910 Ko Sang Yong, A Sudy on he Proecion of Tenans leasing Dwelling - House, Universiy of Sungkyunkwan Social Science Review Vol.17 No.1 pp5-50, 1979, re-quoe Choi Chang-Gyu & Ji Kyu-Hyun, Modeling Chonsei and Monhly Ren Srucure wih Morgage Lending and Tenan's Asse Consrain, Korea Planners Associaion Urban Planning, Vol. 42 No. 3 pp , 2007, re-quoe 4 Se-Jik Kim(Seoul Naional Universiy) & Hyun Song Shin(Princeon Universiy), Financing Growh wihou Banks: Korean Housing Repo Conrac, p. 3 5 Se-Jik Kim(Seoul Naional Universiy) & Hyun Song Shin(Princeon Universiy), Financing 1

2 from he house owner o he enan bu also a privae loan conrac from he enan o he landlord. Various causes of he developmen of Jeonse may be observable in Korea, bu he sysem mainly consiss of he following wo facors: expecaions for house price increase and lack of insiuional housing finance marke 6. A he early sage of economic developmen in he 1960s o 1970s, he rural disric collapsed and urbanizaion acceleraed, and he demand for houses(housing) in he ciy increased. In he 1980s, rapid economic growh furher increased he urban concenraion of populaion, and he demand exceeding supply led o a full-fledged house price increase. In he 1990s, he 2 Million Houses Consrucion Plan, which was implemened in he 1998 o 1992 period(five years), was carried ou. To some exen, a massive supply of houses eased he gap beween supply and demand for houses, undergoing improvemen in he mid-1990s. Afer a emporary rebound in 1996 and 1997, housing price collapsed sharply in he wake of he Asian financial crisis in The house price increase in he early and mid-2000s seems o be caused by he expecaions of profi from invesmen in real esae compared wih he financial asses, as low ineres raes coninued o prevail. The many changes in he home sales price index from January 1986 o Ocober 2011 accoun for 153.3% naionwide and 180.2% in Seoul area, he norhern par(gangbuk area) of which rose by 103.9%, and is souhern par(gangnam area) dramaically climbed by 266.2%. Growh wihou Banks: Korean Housing Repo Conrac, p. 3 6 Underdevelopmen of house financial marke made ripple effec like US sub-prime morgage crisis be resriced in 2008 financial crisis 7 Kim Kyung-Sik, Srucure Change of Housing Marke, LG Economic Research Insiue, p.6,

3 [Figure 1] Movemen of All Types 8 of House Purchase Price Index (Seoul Gangnam, =100) Sources: Kookmin Bank Home Price Trends Survey Paricularly, such increases can be clearly seen in aparmen-ype 9 housing. A look ino he changes in he aparmen sales price index shows 314.5% naionwide and 369.3% in Seoul area, he norhern par(gangbuk area) of which rose by 237.5%, and is souhern par(gangnam area) dramaically climbed by 448.2%. These figures far exceed 202.4% naionwide and 200.7% in Seoul, he changes in consumer price index during he same period. 8 Types of houses are Aparmens, Deached houses, Row houses(sources: Kookmin Bank, Home Price Trends Survey ). 9 An aparmen is a five-sory or more building(sources: Kookmin Bank, Home Price Trends Survey ). 3

4 [Figure 2] Movemen of Aparmen Purchase Price Index (Seoul Kangnam, =100) Sources: Kookmin Bank Home Price Trends Survey Meanwhile, Park Chung-hee s Governmen 10 coninually exercised sric conrol and supervision on he financial marke o suppor expor and foser paricular indusries, such as he heavy chemical indusry. The survival of he privae money marke under he governmen s various regulaions on ineres rae and financial repression argeing forced money allocaion, or he policy loans for paricular areas, was ineviable 11. The governmen s regulaions on he money marke and concenraion of policies on he corporae financial secor played a pivoal role in he exisence and developmen of Jeonse, a non-insiuional money marke, in he household and home financial marke. The realiy is ha he counry s money marke was very incomplee compared wih ha of advanced counries, and he marke s loan-o-value raio, a baromeer showing he degree of limiaions on liquidiy, sood a abou 20% o 40% in 10 From 1962 o Korean Economy Compilaion Commiee, The Korean Economy: Six Decades of Growh and Developmen, Korea Developmen Insiue(in Korean) Vol. 1 p.28, 2010, 4

5 An increase in demand for speculaive money semming from he expecaion for house price increase and he non-exisence of household and home loans in he insiuional marke ha could accommodae his facor led o a paricular sysem called Jeonse, a privae money marke, in he housing money marke. Tha is, Jeonse is he key variable in linking house purchase, housing renal, and housing finance markes. Therefore, he hree markes should be considered in analyzing he facors affecing Jeonse price. However, previous relaed sudies are limied only o he house purchase marke or housing renal marke in he invesigaion of Jeonse price deerminans. Therefore, he presen paper analyzed he reason Jeonse price heoreically has a differen house purchase price even hough boh provide he same housing services, considering he acual Jeonse sysem characerisics in erms of house purchase, housing renal, and housing finance markes. The curren paper also invesigaed wheher he heoreical model coincides wih he acual Korean siuaion. [Figure 3] Facors Disinguishing Jeonse Price from House Purchase Price Expecaio ns for House Purchase Price : E [ a 1 ] Morgage Loan Inres raes : r regulaion : regulaion 12 Lim Yun-Sung, Liquidiy Resricions on Life Cycle Model and Analysis of Chonsei Price o Sale Price Raio, Korean House Sociey Journal of house, Vol. 8 No. 8 pp.6-7,

6 Esimaion resuls indicae ha, firs, he expecaions for house price increase is significan and opposie o he Jeonse price. Thus, he lower he expecaions for house price increase is, he higher he Jeonse price, which ends o approach he house purchase price. Second, he morgage loan ineres-raes is also significan and posiive in relaion o Jeonse price. Finally, he resuls indicae ha governmen regulaion on he housing finance marke is also a significan and negaive influence. The previously saed finding shows ha he recen surge in Jeonse price, ogeher wih he decrease in Jeonse supply, is a naural phenomenon because expecaions for house price increase has begun o sagnae, and an official housing financial secor has been developed in he pas 15 years. The curren paper has four secions. In secion 2, he heoreical model addressing he difference beween he Jeonse price and house purchase price is presened. The facors affecing he difference beween he Jeonse price and house purchase price are also inroduced. The proposed esimaion mehod and esimaion resuls are presened in secion 3. In secion 4, he conclusion is presened. Chaper 2. Theoreical Model Adequae Jeonse Price in House Purchase Marke The house is an imporan asse in deermining he flow of housing service. Thus, wo markes relaed o he house exis : he asse marke ownership is ransaced (house purchase marke), and he housing renal marke housing services are raded for a cerain period 13. Tha is, he house has wo characerisics of consumer goods ha provide domicile service and invesmen o obain capial gain in he fuure. Therefore, 13 Kim Jung-Ho & Lee Myung-Jae, An Empirical Analysis of Jonsei Deposi Raio in Seoul Housing Marke, Korean Regional Science Associaion Regional Sudies, Vol. 5 No. 1 pp.13-26,

7 house purchase price consiss of he cos of housing services(house as consumer goods) and capial gain(house as invesmen). 14 The demand for Jeonse is purely he demand for housing services, whereas he demand for house purchase is he demand including he capial gain and domicile service. Thus, no capial gain can be obained from owning he house, so he house purchase price becomes he same as he Jeonse price. Equaion (1), represening house purchase price( P ), is equal o Jeonse price( C ) if he housing marke is perfecly effecive and if he depreciaion cos of he house and propery ax is no considered. P C (1) However, as [Figure 4] he Jeonse/Purchase price raio for Aparmen, he mos well-known house ype in Korea indicaed, pracically house purchase price is much higher han Jeonse price. 14 Hwang Doo-Hyun, The Lagged Adjusmen Process of Sales and Renal Prices in Korean Housing markes, Universiy of Hongik Economic Review, Vol. 6 pp23-38,

8 [Figure 4] Jeonse/Purchase Price Raio for Aparmen, Oc Sources: Kookmin Bank Home Price Trends Survey The ime series daa also indicae ha he house purchase price has been persisenly higher han he Jeonse price. [Figure 5] The Trend of Jeonse/Purchase Price Raio for Aparmen, from Oc Sources: Kookmin Bank Home Price Trends Survey 8

9 The main reason for he price gap in he same conrac o obain he righ of residence seems o be he expecaion ha home ownership is more profiable han home lending via Jeonse. Jeonse price, when compared o housing price in Seoul where he opporuniy of capial gain is grea has acually been consisenly lower han he price in he whole counry. If he cos, such as ax or he mainenance fee, is no considered, he arbirage condiion beween he house purchase price and Jeonse price can be presened as follows. P C E [ a 1] (2) P is he house purchase price, C is he Jeonse price, and E ] represens [ a 1 he expecaions for house price increase. Equaion (2) indicaes ha he house purchase price consiss of wo pars: Jeonse price of he pure housing cos and capial gain. Equaion (2) can be rearranged o obain C ( 1 E [ a 1]) P (3) Therefore, he adequae Jeonse price is deermined as Equaion (3) in he house purchase marke. According o Equaion (3), he lower he expecaions for house price increase is, he larger he difference beween he Jeonse price and house purchase price. As an exreme case, if he expecaion for house price increase converges on zero, he Jeonse price would be equal o house purchase price Facors Affecing he Jeonse Price in he Housing Renal and Housing Finance Markes Hisorically, housing renal conracs mainly consis of he Jeonse conrac. However, since he 2000s, much of he Jeonse conrac has been changed o quasi- 9

10 Jeonse (i.e, reducing he Jeonse deposi money and receiving monhly ren in reurn). Naurally, he raio of Jeonse conrac in he housing renal marke sared o decrease. This change in he housing renal marke is closely conneced o he change in he housing finance marke. The 1997 Korean financial crisis grealy affeced many differen fields. For example, financial companies indiscreely len money o companies before 1997 because hey believed he governmen would ac like a final loaner. However, hey ook a big hi in he financial crisis, so hey changed heir markeing sraegy o consumer finance focusing on housing morgage loan. Their change in sraegy resuled in he rapid increase of consumer finance loans. [Figure 6] Raio of Household Loans in Commercial Banks Sources: Bank of Korea, Bank of Korea Research-Bo Some researchers (e.g., Lee 2002) argued ha Jeonse as privae financing would disappear and all of he housing lending conracs would change o pure monhly ren conracs because of he recen vializaion of consumer finance and he decrease of he raio of Jeonse conrac in he housing renal marke. This poin of view regards Quasi- Jeonse as a ransiional lending conrac ha occurs in he process in which Jeonse 10

11 changes o pure monhly ren 15. Wihou a doub, he role of Jeonse, which has aced like informal housing finance, decreases because of he developmen of he formal housing finance marke, excep for he following issues: wheher he developmen of Quasi-Jeonse is a ransiional phenomenon ha occurs in he process in which Jeonse changes o pure monhly ren, or wheher he coexisence of Jeonse, Quasi-Jeonse, and pure monhly ren is he equilibrium of he housing renal marke. As a resul, he decrease in he raio of he Jeonse conrac in he housing renal marke will necessarily affec Jeonse price. Thus, if we consider he effec of he decrease in Jeonse supply on Jeonse price, because of changes in he housing renal marke and he housing finance marke, we can obain he equaion below. Commen [Ed 101]: As much as possible, avoid creaing oo lenghy senences. I is beer o break down he ideas ino shorer, more manageable senences which can give proper emphasis o he houghs/ideas you wan o convey. Check if he revision has clarified he meaning. C ( 1 E [ a 1]) P f ( facors o decrease Jeonse suply) (4) Equaion (4) explains ha a decrease in Jeonse supply due o changed circumsances of he housing renal marke and housing finance marke acs as an inflaionary pressure on renal charge, leading o he adjusmen of adequae Jeonse prices parly deermined by he arbirage condiion. Then, wha are he specific variables in he house renal and house financial markes influencing he supply of Jeonse? Before addressing his issue, we need o focus on he subsanial purpose of he use of Jeonse securiy deposi firs. Jeonse securiy deposi was used no so much as o creae revenue accruing from money deposied in he bank bu generally o use i a means of financial leverage for housing purchase. Choi and Ji (2008) assered ha, as Jeonse securiy deposi could be used as a financial means of house purchase, morgage loans in he insiuional financial marke should also be regarded he same. Tha is, Jeonse as non-insiuional finance and morgage as insiuional morgage loan should be considered subsiues for each oher. 15 Lee Chang-Moo & Lee Sang-Young & Ahn Kun-Hyuck, An Empirical Analysis on Monhly Ren wih Variable Deposi, Korea Planners Associaion Urban Planning, Vol. 38 No. 1 p110,

12 If so, accessibiliy o he insiuional loan marke, and an increase and decrease in he burden of expenses incurred by using he insiuional financial marke will affec hose in overall supply as non-insiuional finance, which is a subsiue for insiuional loan. Cos for using he insiuional money marke can be represened as morgage loan ineres-raes and accessibiliy o he insiuional money marke as a regulaory policy on morgage loan. The discussion will be exended. Considering he variables can cause a decrease in Jeonse supply in he aforemenioned adequae Jeonse price under he arbirage condiion. Therefore, equaion (4) can be expressed as follows: (5) C ( 1 E [ a 1]) P f ( r, regulaion ) (5) A his ime, r insiuional finance, and insiuional financial marke. indicaes he morgage loan ineres-raes on borrowing from regulaion denoes he governmen s regulaions on he This sudy began from he discussion ha Jeonse price, ha is, compensaion for Jeonse conrac ha causes he same housing service, should be he same as house sale price. Moreover, i sough o deermine he causes of exisence of he persisen gap beween Jeonse and sale price in he variables of he house purchase marke, housing renal, and housing finance marke. Equaion (5) shows ha, affeced by he following variables, Jeonse prices may deviae from sale prices and creae a gap: Jeonse price( C ) does no mach House purchase price( P ) because of 1. Expecaion for house price increase ( E ]) [ a 1 2. Morgage loan ineres-raes in he insiuional housing finance marke ( r ) 3. Governmen regulaions on he insiuional housing finance marke ( regulaion ) Expecaion for house price increase( E ]) increases he capial gain on house [ a 1 in he house purchase marke, making Jeonse price deviae from sale price. Tha is, he 12

13 more he capial gain is expeced of house as invesmen goods, he farher he Jeonse price ges from he sale price, decreasing relaively. As morgage loan ineres-raes( r ) decreases, incenives o raising he capial wih Jeonse as privae banking, which is a subsiue, Jeonse supply will decrease in he housing renal marke. Such decrease in Jeonse supply will lead o an increase in Jeonse price. Finally, he governmen can make i difficul or easy o be accessible o commercial banks by inervening in he formal housing finance marke. If he governmen s regulaions( regulaion ) make i difficul o be accessible o commercial banks, he lesser has no choice bu o use Jeonse, which is non-insiuional finance. This phenomenon leads o an increase in Jeonse supply in he housing renal marke. Commen [E12]: Check if his should be laer. Therefore, he governmen s ighened regulaions will increase Jeonse supply and lower Jeonse price. Nex, in Secion 3, o deermine wheher he heoreical model coincides wih he real Korean siuaion, an esimaion analysis will be performed and invesigaed. Chaper 3. Empirical Analysis Esimaion Daa Jeonse price is affeced by he variables from house purchase, housing renal, and housing finance markes, as I argued in he previous heoreical analysis secion. Variables affecing he difference beween Jeonse price and house purchase price are 1) expecaion for house price increase( E ] ), 2) morgage loan ineres-raes in he [ a 1 formal financial marke( r ), and 3) governmen regulaion on insiuional house finance marke( regulaion ). 13

14 Daa on Jeonse price and house purchase price are based on he indexes of Jeonse price and house purchase price in he Home Price Trends Survey offered by Kookmin Bank. This index uses sales price when he sample house is ransaced and he price derived by he mehod of comparing sales(renal) example 16 when no ransaced. The Laspeyres mehod was applied o repored price o make he index(base period is June 2011). Weighs are he componen raio by region, ype of house, and house invenory(deails on he esimaion equaion are found in he Appendix). Indexes of Jeonse price and house purchase price are no he acual price. Prices of he base period(june 2011) are differen by region, so he indexes of Jeonse price and house purchase price canno be compared by region. However, he aim of his sudy is o analyze he rend of price by region, so I used he house price saisics by Kookmin Bank because i is considered more reliable han he saisics of acual sales price, which reflecs only he price change of he purchased house 17. The naural logarihm of he indexes of Jeonse price and house purchase price were used as level variables. Expecaion for house price increase( E ] ) applied he adapive expecaions [ a 1 hypohesis and employed he average one year pas house price increasing rae as proxy. Pracically, ha consumers in he housing marke have predicive abiliy abou he fuure is hard o say. Moreover, no many sudies on expecaion formaion for paricipans in Korean housing marke have been conduced. Based on he sudy of expecaion formaion for paricipans in he US house marke(hamilon and Schwab 16 An example of he mehod of comparing sales(renal) is he mehod of deermining he price of real esae. Afer collecing many examples of ransacions, he mos similar case is chosen. If needed, he base period or he siuaion can be revised. 1 Facor of region: similariy of locaion 2 Individual facor: physical similariy 3 Revision of siuaion: if he price of he colleced example of he ransacion is inappropriae because of a specific siuaion of he dealer or individual moivaion, he price is correced o a normal one. 4 Revision of base period (similariy of ime): if here is a price change beween he ime of purchasing real esae and he repored ime, he price of he sample ransacion is correced o he price of he repored ime. 17 The aim of saisics of house price in Kookmin bank is o esimae he variaion of price of sample houses which represen all houses, bu he aim of saisics of acual sales price is o esimae he variaion of price of purchased houses. Thus, hey are differen saisics. (Source: Kookmin Bank Home Price Trends Survey ) 14

15 1985), expecaion formaion of economic agens depends on he rend of he pas, no on a reasonable forecasing 18. Moreover, in he presen paper, no only he average one year pas house price increasing rae bu also he average one year pas house price increasing rae lagged on each firs, second, and hird year is considered independen variables, and hey are analyzed ogeher. The paper aemps o overcome he limiaion of previous relaed sudies ha only applied he uniformly shor-erm average pas house price increasing rae as he rising expecaion rae porion, considering ha alhough consumers expecaion formaion for he fuure relies on he pas, a difference exiss depending on he consumers. Privae secor morgage loan ineres-raes of he formal financial marke( r ) is represened as an average weighed by new loans exended during he period by naionwide commercial banks and colleced a he cenral bank. The exac proxy of he privae secor morgage loan ineres-raes of he formal house financial marke is he ineres raes of he morgage loan for privae, bu i colleced only from Sepember The correlaion beween he ineres raes of morgage loan and he privae lending raes from Sepember 2001 o Ocober 2011 is , so using he privae secor lending ineres raes as proxy will no be a problem. I used deb o income (DTI), 19 which is he regulaion for morgage value and borrower s capabiliy o repay as proxy of he governmen s regulaion for he housing finance marke. I used dummy variable, which is one since March 2006 when DTI was implemened in earnes and zero before March The sudy of Hamilon and Schwab is abou wheher paricipans of house marke use all available informaion when hey make heir expecaion.hamilon and Schwab. B.W. Hamilon and D.L. Schwab, Expeced Appreciaion in Urban Housing Marke", Journal of Urban Economics, Vol.17 pp , 1985 Kim Jung-Ho & Lee Myung-Jae, An Empirical Analysis of Jonsei Deposi Raio in Seoul Housing Marke, Korean Regional Science Associaion Regional Sudies, Vol. 5 No. 1 pp.13-26, 1989, re-quoe 19 DTI = (monhly repaymen of he principal and ineres of loan + esimaed repaymen of ineres of oher loans) / monhly income 15

16 The objecs of analysis are he aparmens, which are he main housing ype of Korea, and overall houses, which include aparmens 20, deached houses 21, and row houses 22. Regions of analysis are he enire counry, Seoul 23, Gangnam in Seoul 24, and Gangbuk in Seoul 25, respecively. Period of analysis is from January 1996 o Ocober 2011, for a oal of 190 monhs Esimaion Mehod and Esimaion Resuls I ook he logarihm of each variable based on Equaion (5). The following shows he regression model: ln C ln P ln(1 a) ln(1 a1) ln(1 a2) ln(1 a3) ln r ( regulaion ) (6) a represens he average one year pas house price increasing rae, and a1 a 2, and a3 represen ha of lagged a a one, wo, and hree years, respecively. The esimaion mehod used is he ordinary leas squares mehod. The presen paper aemps o analyze he following. Firs, is here a difference beween Jeonse price and house purchase price, which boh provide exacly he same housing service(i.e., 20 An aparmen is a five-sory or more building (including he five-sory or more dormiories.) 21 Deached houses include houses ha are no aparmens, row houses, muliplex houses, or dormiories. They also include houses wih small shops inside and muliple dwellings. 22 Row houses include four-sory or less buildings ha have more han 660 m2 gross area. (including four-sory or less dormiories). 23 Capial ciy of Korea 24 Gangnam in Seoul includes 11 gu (an adminisraive disric of Korea) souh of he Han River, which are Gangnam-gu, Gangdong-gu, Gangseo-gu, Gwanak-gu, Gurogu, Geumcheon-gu, Dongjak-gu, Seocho-gu, Songpa-gu, Yangcheon-gu, and Yeongdeungpo-gu. 25 Gangbuk in Seoul includes 14 gu norh of he Han River, which are Gangbuk-gu, Gwangjin-gu, Nowon-gu, Dobong-gu, Dongdaemun-gu, Mapo-gu, Seodaemun-gu, Seongdong-gu, Seongbuk-gu, Yongsan-gu, Eunpyeong-gu, Jongno-gu, Jung-gu, and Jungnang-gu. 16

17 C P or no)? Second, if here is a difference beween he wo prices, is i possible o explain i using he variables from house purchase, housing renal, and housing finance markes. Therefore, I esed he null hypohesis H 1 and H : 0 ( i 2,...,7). 0 : 1 0 i The esimaion resuls on he enire counry, Seoul, Gangnam in Seoul, and Gangbuk in Seoul are presened in [Table 1] and [Table 1-1]. [Table 1] Esimaion Resuls of Overall Houses by Regional Groups for H 1 0 : 1 Whole Counry Seoul Seoul, Gangnam Seoul, Gangbuk Classificaion Log(house purchasing price) ** (0.845) (0.557) (0.037) (0.172) noe: *** p<0.01, ** p<0.05, * p<0.1 The esimaion resuls of he overall houses are presened in Table 1. Null hypohesis( H 0 ) is 1. The esimaion resuls show ha, generally, he null 1 hypohesis, ha is, he Jeonse price is equal o he house-purchasing price, canno be rejeced excep for Gangnam in Seoul. Thus, his resuls show ha Jeonse price is no differen from he house purchase price. However, his is no he case in Gangnam in Seoul. Jeonse price is differen from he house purchase price a a 5% significance level in Gangnam in Seoul. These esimaion resuls are consisen wih he fac ha he increase in house price in Korea mainly occurred in Seoul, especially in Gangnam, he souhern pars of Seoul. Jeonse price is differen from he house purchase price in he region where people expec grea capial gain. 17

18 [Table 1-1] Esimaion Resuls of Overall Houses by Regional Groups for H : 0( i 2,3,4,5,6,7 ) 0 i Whole Counry Seoul Seoul, Gangnam Seoul, Gangbuk Classificaion log(1-a) log(1-a1) log(1-a2) log(1-a3) log(lending ineres rae) regulaion *** *** *** (0.000) (0.004) (0.000) (0.393) *** 0.778** 1.004** (0.383) (0.001) (0.014) (0.010) 1.031** 2.571*** 2.870*** 4.563*** (0.018) (0.000) (0.000) (0.000) 3.488*** 4.623*** 3.672*** 4.246*** (0.000) (0.000) (0.000) (0.000) *** *** *** *** (0.000) (0.000) (0.000) (0.000) *** *** *** *** (0.000) (0.000) (0.000) (0.000) Number of obs R-squared Roo MSE noe: *** p<0.01, ** p<0.05, * p<0.1 The average growh rae of house purchase price lagged one, wo, and hree years(i.e., a 1, a 2, and a 3, respecively) is significan o Jeonse price in Gangnam and Gangbuk of Seoul and Seoul(including Gangnam and Gangbuk). However, heir effec on Jeonse price is relaively small in he enire counry. These resuls emerged as only he average growh rae of house purchase price lagged wo and hree years( a 2, a 3 ) is significan in he enire counry, and he coefficien is smaller han ha in Gangnam and Gangbuk of Seoul and Seoul. This esimaion covers he enire counry; hus, i seems ha he growh rae of house purchase price is no closely linked o he Jeonse price in small and medium-sized ciies, excep Seoul. Expecaion for capial gain has been large 18

19 in Gangnam of Seoul. Based on he empirical heoreical argumen, if here are expecaions for capial gain, he gap beween house purchase price and Jeonse price occurs hrough he house purchase marke, and he supply of Jeonse increase hrough he house renal marke. Finally, he Jeonse price decreases. The ineres-raes of privae loan( r ) was significan and negaive o Jeonse price a a 1% significance level in all regions. This finding suppors he heoreical argumen ha, if he ineres-raes of loan, which is he cos for using he formal financial marke decreases, he preference of he lender for Jeonse, which is informal finance, decreases; hus, Jeonse price increases because of he decrease in Jeonse supply. The regulaion variable( regulaion ) was also negaively significan a he 1% significance level, as prediced by heoreical analysis in all regions esimaed. These esimaion resuls are consisen wih he fac ha accessing he housing finance marke is difficul because of DTI, supply of Jeonse, privae housing finance, increases, and Jeonse price decreases. Here, he coefficien of Seoul is greaer han ha of he enire counry. This finding is assumed because pracical regulaion is imposed inensively in Seoul, where house price has dramaically increased. Conclusively, he variables were mosly significan o Jeonse price, as prediced by heoreical analysis. However, he coefficien of he house price increasing rae variables(i.e., a 1, a 2, and a 3 ) was relaively higher compared wih ha of privae lending ineres-raes( r ) or regulaion( regulaion ) variables. We can assume ha when he role of house as he invenory o ake capial gain primary is emphasized, he incenives o raise funds are subsidized from he formal or informal financial marke o obain capial gain. Nex, he esimaion resuls of aparmens, which accoun for over 50% of Korean house ypes and have an overwhelming house price increasing rae compared wih deached houses or row houses, are presened. The resuls analyzed by regional groups are given in [Table 2] and [Table 2-1]. 19

20 [Table 2] Esimaion Resuls of Aparmens by Regional Groups for H 1 0 : 1 Whole Counry Seoul Seoul, Gangnam Seoul, Gangbuk Classificaion Log(house purchasing price) 0.820*** 0.768** 0.663*** (0.000) (0.018) (0.000) (0.138) noe: *** p<0.01, ** p<0.05, * p<0.1 Esimaion resuls when he house is resriced o aparmens are presened in Table 2. Null hypohesis is 1 1. This resul is very differen from ha for overall houses(incliding aparmens, deached houses, and row houses). Esimaion resul shows ha Jeonse price was differen from house purchase price a a 1% significance level in Gangnam of Seoul (5% significance level for overall houses). An imporan difference for aparmens is ha Jeonse price was differen from he house purchase price a 1% and 5% significance level in he enire counry and Seoul, respecively. Similarly, he Jeonse price was low in he region(i.e., Gangnam of Seoul) where people have grea expecaion for capial gain (Table 1). The main reason why he Jeonse price of aparmens deviaed much from he house purchasing price is ha he capial gain of aparmens was much greaer han ha of deached houses and row houses. 20

21 [Table 2-1] Esimaion Resuls of Toal Housing Types by Regional Groups for H : 0( i 2,3,4,5,6,7 ) 0 i Whole Counry Seoul Seoul, Gangnam Seoul, Gangbuk Classificaion log(1-a) log(1-a1) log(1-a2) log(1-a3) log(lending ineres rae) regulaion *** *** *** *** (0.000) (0.000) (0.000) (0.003) 0.339*** 0.964*** 0.667** 1.264*** (-0.108) (0.001) (0.013) (0.000) 3.066*** 3.279*** 2.630*** 3.526*** (0.000) (0.000) (0.000) (0.000) 2.682*** 3.509*** 3.267*** 2.880*** (0.000) (0.000) (0.000) (0.000) *** *** *** *** (0.000) (0.000) (0.000) (0.000) *** *** *** *** (0.000) (0.000) (0.000) (0.000) Number of obs R-squared Roo MSE noe: *** p<0.01, ** p<0.05, * p<0.1 The average growh rae of house purchase price lagged one, wo, and hree years(i.e., a 1, a 2, and a 3 ) was more significan in aparmens han in overall houses. The average growh rae of house purchasing price lagged one year( a 1) was no significan in overall houses bu was significan a he 1% level in Seoul and enire counry for aparmens. This finding may be caused by he fac ha aparmens have been used as a means of obaining capial gain han overall houses, which include deached houses and row houses. Thus, his expecaion for capial gain affecs he relaive decrease in Jeonse price in aparmens. 21

22 The ineres-raes of privae loan( r ) was significan and negaive o Jeonse price a he 1% level in all regions in overall houses. However, he coefficien was generally increased in overall houses. The reason is ha he ineres-raes of privae loan as cos for he formal financial marke becomes more imporan, as aparmens serve as invesmen goods o obain capial gain han overall houses. The regulaion variable( regulaion ) is no much differen from he case of overall houses. I was also negaively significan a he 1% significance level, as prediced by heoreical analysis in all regions esimaed. These esimaion resuls are consisen wih he fac ha accessing he housing finance marke is difficul because of DTI, supply of Jeonse, privae housing finance, increases, and Jeonse price decreases, as well. Variables are mosly significan o Jeonse price, as prediced by heoreical analysis, in he case of aparmens as well. However, he resuls for aparmens show ha Jeonse price is differen from sales price, he explanaion power of he house price increasing rae variables(i.e., a 1, a 2, and a 3 ) have improved, and he coefficien value of privae lending ineres-raes( r ) is higher compared wih he case of overall houses. Considering he region expeced o obain more capial gain compared wih oher regions(seoul Gangnam) and he probabiliy ype expeced o have more capial gain compared wih oher ypes of houses(aparmens), he incenives o inves in houses are likely o increase by raising funds. In his case, Jeonse price has a gap wih he house purchase price, improving he explanaion power of he variables(i.e., a 1, 2 a, a 3 and regulaion ). Moreover, he mos imporan facor marking he difference beween Jeonse price and house purchase price is he expecaion for house price increase., r, Chaper 4. Conclusion knowing he Jeonse sysem is very imporan o gain an in-deph undersanding of he Korean housing marke. The Korean Governmen is rying o sabilize he Jeonse price o improve housing securiy for he Korean people. Furhermore, a recen, sharp 22

23 rise in Jeonse price had a srong influence on people, such ha he press repors his issue every day. Despie his siuaion, here has been very lile research focusing on he Jeonse price, even hough here are research abou how he housing price is deermined, how much housing price affecs Jeonse price, or vice versa. The presen paper analyzed he reason why Jeonse price has heoreically a differen house purchase price, in consideraion of he acual Jeonse sysem characerisics wih respec o house purchase, housing renal, and housing finance markes. I also invesigaed wheher he heoreical model coincides wih he real Korean siuaion. The curren work sared from house purchase marke. I began wih addressing he issue of why Jeonse price is differen from house purchase price, even hough boh provide he same housing services(same locaion, same physical space). Pracically, Jeonse price is lower han he general house purchase cos in he mos regions of Korea. Firs, his sudy obained he reason ha Jeonse price is lower han he house purchase price due o he expecaion for house price increase. Houses are used no only as consumer goods ha provide domicile service bu also as invesmen o obain capial gain in he fuure. Empirical resuls indicaed ha he Jeonse price is more likely o have a gap wih house purchase price in region Gangam of Seoul expeced o obain more capial gain compared wih oher regions, and in aparmen house ype expeced o have more capial gain compared wih oher ypes of houses. Also, he explanaion power of he house price increasing rae variables(i.e., a 1, a 2, and a 3 ) have improved in his region and his ype. Moreover, he mos imporan facor marking he difference beween Jeonse price and house purchase price is he expecaion for house price increase because coefficien value of house price increasing rae is higher han hose of oher variables. Second, he sudy focused on he role of Jeonse in he housing renal and housing finance markes. Jeonse no only funcions as a house-renal conrac service bu also plays an imporan role as a curbed privae loan marke in he absence of an official 23

24 privae banking secor. From 1990s, however, as insiuional money marke open o privae secor, he decrease in he raio of he Jeonse conrac in he housing renal marke affec o increase Jeonse price. This was shown ha ineres-raes of privae loan and regulaions on he housing financial marke variables was significan and negaive. Conclusively, if here are sable housing marke raded only housing services and no excessive capial gain from house ownership and i is easier o assess he insiuional house finance marke, Jeonse price will approach house purchase price as well as raio of Jeonse conrac in he housing renal marke will decrease. Therefore, he recen surge in Jeonse price, ogeher wih he decrease in Jeonse supply, is a naural phenomenon because expecaion for house price increase has been sagnae, and an insiuional housing financial secor has been developed in he pas 15 years. 24

25 Appendix: Esimaion Equaion abou Indexes of Jeonse price and House purchasing price Sources: Kookmin Bank Home Price Trends Survey 1. Index of i-house ype in h region :, where 2. Overall index in h region :, where 3. Overall index of i-house ype : 4. Overall index in he whole counry : h : region (gu or ciy) i : ype of house (i=1,2,3) j : individual sample house θ : Indexes of House purchase price : Indexes of house purchase price(jeonse price) a : Indexes of house purchase price(jeonse price) a base period : raio of house price a W : weigh using raio of house sock d : weigh using probabiliy of selecion : sample size of i-house ype in h region : populaion size of i-house ype in h region 25

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