The paper analyzes the impact of an unanticipated rise in interest rates by
one percentage point on housing price changes per assumed scenarios after the
sampling period is divided into the periods in which interest rates, purchase
and jeonse prices are on the rise and on the decline respectively. It uses the
data from 1991 to date. According to the empirical results, when the period in
which interest rates increase generally overlaps with the period in which
housing prices decrease, a positive shock for interest rates by one percentage
point has a biggest impact on the decrease in housing price changes. Jeonse
price changes also respond to a positive shock for interest rates more
sensitively than purchase price changes during the period in which interest
rates are on the rise. The results are similar, even though macroeconomic and
financial variables such as industrial production, consumer prices, KOSPI, and
won/dollar exchange rates are considered as control variables. The main
conclusions hold when dummy variables are used for the currency crisis and
global financial crisis periods, as well as for the periods in which LTV and DTI
restrictions are introduced. Therefore, given the recent economic situation of
G2 and the relative seriousness of domestic household debt, the monetary
authority, who plans to increase the policy interest rate, need consider the
interrelationship between interest rates and housing prices.