Demographic shifts, macroprudential policies, and house prices

Summary

Focus

In the past decade, population ageing and the rising number of single-person households have transformed demographic structures worldwide. However, the impact of such changes on house prices is still only imperfectly understood. We investigate the relationship between house prices and demographic changes and its significance for macroprudential policies, focusing on Korea, a country facing exceptionally rapid demographic shifts.

Contribution

We test how various demographic factors affect house price growth at the disaggregated level in Korea from the first quarter of 2008 to the fourth quarter of 2017. Our data set has unique features, including a variety of house price indexes based on property types, quantified loan-to-value and debt-to-income limits, and other demographic factors at the district level. Specifically, we attempt to shed light on how the elderly population and single-person households, together with their response to macroprudential policies, affect house prices.

Findings

First, high elderly dependency ratios, unlike youth dependency ratios, lead to house price increases. Contrary to the life-cycle and asset meltdown hypotheses, this evidence suggests that ageing may not cause house prices to drop. This is probably because the elderly tend to own houses even after their retirement because of their increased life expectancy, thanks to improved public health.  

Second, house price growth is weaker in districts with a high proportion of single-person households, which appears to be associated with their lower income or delayed family formation.

Third, macroprudential policies are not a channel through which elderly and single-person households affect house prices. At the same time, these policies generally work as expected, so that loosening policy tends to increase house price growth. One possible reason is that elderly and single-person households are not eligible for loans due to their lower incomes.

Abstract

This paper investigates how recent demographic changes – population aging and the rising number of single-person households – affect house price growth using 95 district-level data in Korea from Q1 2008 to Q4 2017. Based on a unique data set that includes quantified macroprudential policy variables and various house price indices from real transaction data, our analyses yield three key findings. First, house price growth increases in districts with high aged dependency ratios, suggesting that aging is unlikely to drive house prices downward. Second, house price growth falls in districts with a high proportion of single-person households, possibly due to their low level of income or delayed family formation. Third, macroprudential policies are generally effective, but not for the elderly and single-person households. Overall, the evidence suggests that demographic shifts are an essential factor for determining house prices.

JEL Codes: J11, J10, R31, E58, G10

Keywords: demographic structure, aging population, single-person households, macro-prudential policies, house price growth