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The Impact of Real Estate Price Drop and Interest Rate Fluctuation on Households’ Default Risk

  • Korea Real Estate Review
  • 2023, 33(2), pp.7-24
  • DOI : 10.35136/krer.33.2.1
  • Publisher : korea real estate research institute
  • Research Area : Social Science > Law > Law of Special Parts > Law of Real Estate
  • Received : March 13, 2023
  • Accepted : June 23, 2023
  • Published : June 30, 2023

Noh, Min-ji 1 Lee, Kyung Ae 2

1국토연구원
2LH 토지주택연구원

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ABSTRACT

This paper examines the effect of real estate price decline and interest rate fluctuation on the default risk of mortgage-holding homeowners. Default risk is measured using cash flows and net asset holdings at the household level. First, using a stress test, we examine how these measures are affected by a variety of stress scenarios. The result shows that 0.14%–4.02% of households are at risk of default; therefore, the households’ default risk is not high. However, youth and middle-aged individuals are exposed to higher default risk than other age groups, and an estimated 56.5% of youth exposed to default risk belong to the middle-income class. Second, employing the probit model, we find that socio-demographic characteristics such as sex, age, and education variables are no longer significant independent variables for youth and middle-aged individuals compared with all other age groups. Furthermore, households with low financial assets, low net assets, multiple mortgages, and multiple properties have a higher default risk. Our results shed light on the necessity of monitoring youth and middle-aged individuals' financial health in order to lessen their social and economic impact.

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