Interest Rates, User Cost of Capital, and Housing Price Dynamics

This paper seeks to explore how the relationships among interest rates, user cost of capital and housing price dynamics vary across countries with different mortgage financing arrangements and housing supply systems. The paper starts with a survey of the theoretical and empirical literature on the relationships. We then present an analytic framework and conduct empirical analyses of U.S., U.K., and Korean housing markets. Special attention will be given to the connectivity among interest rate regimes (i.e., real vs. nominal rates, and short vs. long rates), user cost of capital, and boom-bust in housing price. Time-varying restrictions on mortgage lending, LTV and DTI in particular, along with tenure system in each country will be included as a part of empirical analyses. Based on our findings, we will further discuss policy implications as to transmission mechanism of monetary policy to housing market, and policy instrument to ensure stability thereof.