The Effect of Macroeconomic Fundamentals and Demographic Change on Housing Price

This paper studies the effect of macroeconomic fundamentals and demographic change on housing price in Korea. A housing price model is specified as the function of GDP, interest rate, housing construction permit, and working age population to examine the effect. Based on the observation that the variables are non-stationary, unit root and cointegration tests are performed. Unit root test indicates that the variables are non-stationary and first-order integrated. Cointegration test, however, shows that the variables are co-integrated, implying that a stable long-run relationship exists among the variables. Based on the cointegration test result, a vector error correction model is constructed and estimated. The VECM estimation result shows that while GDP and interest rate significantly affect housing price, the effects of housing construction permit and working age population are statistically insignificant. Empirical result of this paper suggests that the macroeconomic fundamentals that affect the demand side of the housing market are important determinants of housing price in Korea.