Authors : Sungho Choi (Korea Credit Bureau Research Center), SangYoon Song(Seoul National University), Youngsik Kim(Seoul National University) 

Abstract

This paper examines the response of household consumption to house prices using South Korea household-level micro data that contain comprehensive information on homeowner’s income, expenditure, debt repayments and demographic factors in the 2008-2014 waves. The dynamic panel method is used to consider the dynamic characteristics of consumption, and the system GMM method is applied to control the endogeneity problem.
The main results are as follows. First, the house prices are significantly and positively related to consumption. The magnitude of the effect, however, is smaller than that of the change in income level. Second, the sensitivity of consumption to housing wealth is relatively high in groups with higher income, lower DTI, older age or having experienced the increasing-trend of house prices. Especially, the changes of house prices hardly affect consumption in groups with relatively higher DTI or lower income. Third, the effect of relaxing borrowing constraints by rising house prices is positively correlated with consumption, particularly for households that are more likely to be borrowing constrained owing to relatively higher LTV close to regulatory cap, lower income, and being the self-employed.