The Global Financial Crisis and Housing
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The Global Financial Crisis and Housing

A New Policy Paradigm

Edited by Susan Wachter, Man Cho and Moon Joong Tcha

This innovative book analyses the role played by real estate markets in global financial stability and examines the fragile link between the two. Through what transmission channels do housing market cycles influence broader economic systems? How has the Global Financial Crisis shifted our view and understanding of these linkages? This detailed book answers these questions in an international comparative perspective. Specific topics covered include macroeconomic transmission channels of the housing cycle, the role of housing in the finance system, construction financing as a cycle amplifier, and various related public policy issues such as the policy remedies needed to deal with housing and mortgage-driven crises.
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Chapter 11: Housing and macroeconomy, Korea: the role of housing loan-to-value

Inho Song


Korean housing has become a hot issue in current macroeconomic movements since the global finance crisis in 2008. In fact, since then, the Korean economy has been affected by shocks to globally weakening demand. In particular, the linkage between housing and macroeconomic activity has been recently explored by several branches of the macroeconomic literature through various channels: (1) consumption channel through the wealth effect (Goodhart and Hofmann 2007); (2) financial market channel through the collateral effect from credit in balance sheet (Mishkin 2007); and (3) construction investment channel contributing to GDP (Muellbauer 2011). As shown in Figure 11.1, housing and macroeconomic activity is mutually and circularly dependent. The shocks to both demand and supply in a housing sector have an impact on consumption, investment, and financial credit markets, which eventually lead to changes in GDP. These changes in GDP affect the housing sector in a circular process. The linkage between housing and the macroeconomic activity is a key element of macro prudential policy, since housing plays an important role in the Korean macroeconomy in several points. For example, housing consists of 1.5 times of the gross domestic product (GDP) (Table 11.1) and 76 percent of household assets as of 2010. The construction investment contributed to 17 percent of GDP in 2011, while private consumption comprises 53 percent of GDP.

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