Seemingly Irrational but Predictable Price Formation in Seouls Housing Market

Abstract

This paper tests the dynamics implied by a supplied-constrained view of the relationship between market fundamentals and house prices in the case of Seoul's condominium market. The view is that supply constraints have led to serious shortages in certain submarkets, and that these shortages have led to a rapid rise in house prices and to panic buying or inflation-induced investing and to further price increases. The estimation period of the test is November 1988-February 2007. The results suggest that house prices in Seoul are highly persistent because of these supply constraints. Additionally, we do what we can with the available data to determine if house price increases serve to increase demand further, and if rent-price ratios and nominal interest rates are a good predictor of how housing prices in Seoul will evolve over time.