A New Policy Paradigm
Edited by Susan Wachter, Man Cho and Moon Joong Tcha
Chapter 4: Global financial crisis and early warning system of Korean housing market
The perception that sustaining the stability of the housing market is necessary for sustaining the stability of the economy as a whole began to attract more attention especially after the recent Global Financial Crisis (GFC). For sustaining economic stability, carefully constructed and efficiently executed pre-emptive housing policies are necessary. However, examples of adequate pre-emptive housing policies are rare. There are many reasons why it is hard to implement housing policies in advance, but one of the main reasons is the lack of confidence in house price forecasts. This is especially true in the case of Korea, where the housing market is relatively thin and is highly dependent upon government real estate policies. Both time series and structural models have some problems in forecasting real estate prices (Case & Shillar 1989, 1990; Clapp & Giaccotto 2002)). If the market is fairly stable, pure time series models can be safely used. But, since the Korean housing market is very unstable, the usage of the pure time series models cannot be safely suggested. In the case of structural models, serious problems are associated with adopting exogenous variables and adjusting constant terms. Even if theoretically and empirically appropriate exogenous variables are found, most of them are still very volatile. Therefore, forecasting the values of exogenous variables, which is imperative in forecasting house prices, is extremely difficult.
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