A direct finance in housing market

Kim, Bongjun

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https://hdl.handle.net/2142/107888 Copy

Description

Title

A direct finance in housing market

Author(s)

Kim, Bongjun

Issue Date

2020-04-16

Director of Research (if dissertation) or Advisor (if thesis)

Esfahani, Hadi Salehi

Doctoral Committee Chair(s)

Esfahani, Hadi Salehi

Committee Member(s)

• Hong, Seung-Hyun
• Lee, Ji Hyung
• Lemus Encalada, Jorge

Department of Study

Economics

Discipline

Economics

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

• housing market
• housing finance
• alternative finance
• direct finance
• Jeonsei
• South Korea
• effectiveness of mortgage regulation
• rent-to-deposit ratio
• polarization of housing markets
• geographical premium
• residential value
• investment value
• Gangnam premium

Abstract

A direct finance, an alternative finance option against a mortgage, plays a notable role in housing market. The alternative helps buy-to-let investors respond better to the changes in economic conditions so it may hinder the effectiveness of mortgage regulations. Also, the prices of the rental submarket backed by a direct finance provide an additional information about housing values. The paper studies the roles of a direct finance, finds the empirical evidences, and expects that they will last despite the decreasing finance cost of a mortgage. Chapter 1 examines the short-term impacts of the limit on the number of mortgage loans per household on housing market in a case that households can utilize a direct finance. Tighter mortgage regulations are likely to decrease house prices or calm the speculation in houses. With the alternative finance option available, however, the effect on house prices might lose its intensity. The study exploits two distinctive conditions in South Korean housing market to examine it: the commanding presence of a direct finance and the difference in mortgage regulations between regulatory zones. Using recent rezoning measures and the difference-in-differences method, I document that the regulation placed on the number of mortgage loans may affect house prices, but its impacts vary due to a direct finance. In the areas with high expected capital gains and a low regional rent-to-deposit ratio, the impact on house prices is insignificant, but that on rental submarket is significant. The chapter suggests the theoretical explanation that investors move between rental submarkets to avoid the regulation and there is no decision change in sell-and-buy market. The findings imply that stricter mortgage regulations may not affect house prices when an alternative finance option is available and that the regulations would work in the direction that they deepen the polarization of housing markets. Chapter 2 focuses on the long-run equilibrium relationship between the shares and the costs of finance options in buy-to-let housing market. It is also investigated how the long-run link is restored when the deviation from the equilibrium happens. A vector error correction model (VECM) is applied to this end. By studying the condominium lease market of Seoul, South Korea, I find the existence of the long-run relationship between the relative quantity and costs of finance options, and the role of the adjustment in the relative price. The price adjustment weakens the impact of finance cost change on the relative quantity. The findings suggest several possibilities: the persistent role of a direct finance in spite of the decreasing mortgage rates; the limited effectiveness of monetary policy and financial regulations; and the negative repercussion of strict mortgage regulations, especially for the lessees with low income and little wealth. Chapter 3 explores the magnitudes and the sources of the housing price differentials between areas (“geographical premium”). By using the prices of the rental submarket backed by a direct finance, house prices are divided into investment value and residential value. In empirical study of Gangnam districts in Seoul, I find that the distance to the Central Business District, the distance to private schooling cluster and the percentage of population with graduate diploma are significant factors to explain the premium on the houses in Gangnam districts. After controlling for observed characteristics, the geographical premium due to unobserved factors represents 35.4% of the average of house prices in Gangnam districts. Investment-related part accounts for 80.4% of the total premium. The subgroup analyses indicate that geographical premiums are smaller within houses which are located near subway station. The investment-related premium within houses more than 20 years old is fairly large, which means the old houses in Gangnam districts seem to serve as an investment vehicle. Large families are likely to place a higher residential value on the benefits of good residential environment.

Graduation Semester

2020-05

Type of Resource

Thesis

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Copyright 2020 Bongjun Kim

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