The effect of housing prices on bank performance in Korea

Abstract

This study analyzes the relationship between housing prices and bank performance in Korea. To this end, using lending growth, return on assets, and non-performing loans as a performance measure, we estimate fixed-effects models for each measure. Major empirical results are summarized as follows. First, fluctuations in housing prices affect the banks' lending decisions. If housing prices rise, banks tend to increase the volume of loans. Second, fluctuations in housing prices affect the quality of assets owned by banks. Banks' asset soundness will improve in the case of a rise in housing prices. Third, fluctuations in housing prices have a greater impact on bank profitability when the real estate market goes bust. Our study suggests that in Korea, one of the emerging markets, there is a positive relationship between changes in housing prices and banks' performance. In particular, banks' profitability and soundness could be significantly hampered by a drop in housing prices. Therefore, it is necessary to be wary of excessively expanding real estate loans during the period of real estate booms.