Expectation and Housing Price Dynamics Following Deregulation in Korea

Abstract

This paper offers an explanation for the existence of price control on new houses in Korea, which is deemed both inefficient and inequitable. This phenomenon cannot be explained by the conventional model of rent-seeking or the capture theory of regulation. Instead, it is attributable to the popular belief that the removal of the price regulation will lead to the increase in the overall housing price by increasing the demand for existing houses that are a perfect substitute for new houses. However, the paper, using a stock-adjustment model of the housing market, demonstrates that the claimed outcome cannot materialize under perfect foresight or adaptive expectation. The outcome is possible in the short run under a peculiar expectation scheme of a self-fulfilling nature. But even in this case, the price increase will be a one-time event and in the long-run overall housing prices will fall below the level that would prevail if the price regulations were maintained.