The Impact of Interest Rates on Residential Housing Markets : A Theoretical and Empirical Approach

This study theoretically analyzes the impact of interest rate changes on housing sale prices, jeonse prices, and monthly rent prices , and then verifies these findings through an empirical analysis. First, based on a partial equilibrium model grounded in the User Cost of Homeownership, we show that interest rate changes have a negative effect on housing sale prices and jeonse prices but may not affect monthly rent prices. To empirically validate these theoretical results, using housing market data from 2012 to 2024, we analyze the effects of interest rate fluctuations while controlling for key macroeconomic variables, including interest rates, financial market indicators, fiscal policy variables, economic conditions, inflation, and residential market factors. Given the potential correlation among the error terms of the three housing market segments, we employ the Seemingly Unrelated Regression (SUR) model to account for simultaneous influences from control variables. Empirical results indicate that interest rate changes have a negative impact on both sale prices and jeonse prices but exhibit no statistically significant effect on monthly rent prices, supporting our theoretical analysis.