Testing for Bubbles in Korean Housing Markets: Evidence from a Panel Data Approach

This paper examines the relationship between house prices and rents in Korean housing markets, based on the panel methodologies such as CIPS panel unit root test, panel cointegration test and panel causality test. Further, this paper, using the standard present value model, examines whether bubbles exist in Korean housing market. The result of CIPS test that considers the cross section dependence in a panel indicates that the price and rent series are non-stationary and follow I(1) process, respectively. The results of panel cointegration suggest that there is no long-run steady-state relationship between house prices and rents. Therefore, the panel Granger causality test is used to check the predictability of house prices and rents and shows that there is a bidirectional causal relationship between changes in house prices and changes in rents, although the linkage between the levels of two variables breaks down because of the presence of bubbles throughout the sample period. Finally, based on the bubble indicators, the bubbles started to grow rapidly around 2000 and peaked during 2007~2009.