Interest Rates, User Cost of Capital, and Housing Price Dynamics

Posted: 1 Dec 2010

See all articles by Man Cho

Man Cho

KDI School of Public Policy and Management

Kyung-Hwan Kim

Sogang University

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ; University of Pennsylvania - Finance Department

Date Written: November 29, 2010

Abstract

This paper seeks to explore how the relationships among interest rates, user cost of capital and housing price dynamics vary across countries with different mortgage financing arrangements and housing supply systems. The paper starts with a survey of the theoretical and empirical literature on the relationships. We then present an analytic framework and conduct empirical analyses of U.S., U.K., and Korean housing markets. Special attention will be given to the connectivity among interest rate regimes (i.e., real vs. nominal rates, and short vs. long rates), user cost of capital, and boom-bust in housing price. Time-varying restrictions on mortgage lending, LTV and DTI in particular, along with tenure system in each country will be included as a part of empirical analyses. Based on our findings, we will further discuss policy implications as to transmission mechanism of monetary policy to housing market, and policy instrument to ensure stability thereof.

JEL Classification: E5

Suggested Citation

Cho, Man and Kim, Kyung-Hwan and Wachter, Susan M., Interest Rates, User Cost of Capital, and Housing Price Dynamics (November 29, 2010). 46th Annual AREUEA Conference Paper. Available at SSRN: https://ssrn.com/abstract=1717070

Man Cho

KDI School of Public Policy and Management ( email )

87 Hoegiro
Dongdaemun
Seoul, 130-868
Korea

Kyung-Hwan Kim

Sogang University ( email )

Seoul 121-742
Korea

Susan M. Wachter (Contact Author)

University of Pennsylvania - Wharton School, Department of Real Estate ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104-6330
United States
215-898-6355 (Phone)

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

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