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Housing Wealth Effect of Homeowners by Income Classafter Global Financial Crisis

Hyeon Ji Yu 1,  Youngsung Lee 1

1서울대학교

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ABSTRACT

Both the wealth effect and common-factor hypotheses have long been in conflict to explain the effects of housing prices on consumption. This research is to examine the hypotheses and determine which may be more suitable in South Korea after the worldwide financial crisis occurred in 2008. The analysis found that, first, the effect of the rise in housing prices on household consumption has not been statistically significant since 2009. Second, household debt itself had a positive and statistically significant effect on inducing consumption, but changes in housing prices did not have such a significant effect on the consumption of households in debt. Third, there was no uniform pattern in the effect of changes in housing prices on the consumption of households owning more than one house. Fourth, no statistical significance was found for the effects of changes in housing prices on household consumption by income class. Contrary to the previous literature, the common-factor hypothesis was found to be adequate for South Korea after the financial crisis. Various policies implemented so far in anticipation of the household wealth effect may have only resulted in social cost without any benefits of increase in consumption. Therefore, policies to boost the economy by stimulating the housing market should be considered with caution.

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