The Societal Impact of Rising House Prices in Korea: An Empirical Analysis of Homeownership and Fertility

Abstract

My thesis studies the relationship between rising house prices and (i) homeownership rates and (ii) fertility levels in Korea. I decide to focus on this research topic for several reasons. First, even as the Moon administration has enacted policies to soothe the housing market, prices have been increasing at exorbitant rates. Scholars expect this trend to continue in the short- and medium-term; thus, it is imperative that policymakers properly understand the effects of an overheating market. Second, the impact on homeownership rates is especially important, as homeowning serves as one of the pillars for family formation (in Korea). To the extent that policymakers want to encourage family and societal stability, movements in the ownership rate may be top-of-mind. Lastly, I focus on the fertility rate, as Korea suffers from lowest-low fertility (TFR < 1.3). The government should find ways to remedy current sources of population decline—which include rising housing costs. I will be empirically testing two main hypotheses: First, rising house prices are expected to increase the costs of ownership, thereby lowering the probability that a renter acquires a home. Second, rising house prices are expected to make homeowners feel wealthier, while further marginalizing renters. This may result in higher probabilities of childbearing for owners, but lower probabilities for renters. To address potential issues of endogeneity, I rely on an instrumental variable approach to run my regressions. I follow the methodology of Lutz and Sand to construct the widely used Saiz Instrument in the Korean context, and operationalize it in an IV probit model. The primary findings are as follows: rising prices reduce the probability of homeownership and fertility for renters, in line with our hypotheses. This effect is highly significant; very few renters are predicted to exit the rental sector / give birth if living in high price-growth districts. We do not observe a wealth effect for homeowners, whose fertility decisions may be motivated by non-economic factors. Given the causal ties between rising house prices and (i) homeownership and (ii) fertility, policymakers ought to pay special attention to the housing market. Supply-side measures have been shown to be most effective in curbing price growth in Korea, and I suggest that the Moon administration be more aggressive in implementing development projects.