Housing affordability, borrowing constraints and tenure choice in Korea

Kim, Kyung-Hwan / Park, Soojin / Cho, Man / You, Seung Dong


This paper analyses the linkages between housing affordability and borrowing constraints, and the impact of the latter on housing tenure decisions in Korean cities during the period 2006-2016. The conventional aggregate measures of housing affordability provide a mixed picture. The price to income ratio (PIR) increased in major cities but the home purchase affordability, or repayment affordability improved between 2006 and 2016. Also, the access to mortgage finance increased substantially thanks to the expansion of mortgage supply, low interest rates and lenient macroprudential regulations. We investigate whether and how these changes affected household home purchases using the household-level micro data from the 2006 and 2016 Korea Housing Surveys. We construct the variable indicating the degree of borrowing constraint in terms of wealth each household faces and show that the number of borrowing-constrained households dropped significantly between 2006 and 2016. We then investigate the effect of the wealth constraint by including a measure of the degree of the borrowing constraint as an explanatory variable in the tenure choice equation, together with other key variables such as the cost of owning relative to renting. Estimation results confirm that, as expected, the propensity to home purchases declines if households are judged as wealth-constrained. It was also found that the detrimental effect of the wealth constraint on home ownership increased significantly, particularly for severely constrained households, while the homeownership rates for others improved during our study period. Our findings suggest that affordability measures that do not consider borrowing constraints may not be very helpful in gauging affordability of home purchases at the household level.

Issue Date
Keywords Plus
Homeownership; Britain; Impacts; Demand; Income; Price; Model
Housing affordability; access to mortgage financing; borrowing constraints; tenure choice
Journal Title
International Journal of Urban Sciences
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