Economic Evaluation of Housing Policy on Unsold Residential Inventory -An Application of Computable General Equilibrium Model of Housing Market-

Abstract

This paper develops a framework for the economic analysis of government policies on unsold residential inventory in Korea. An acquisition tax, a transfer income tax and market interest rates are employed to simulate government policies. The framework is composed of a Computable General Equilibrium (CGE) model integrated with a housing model. The housing model accounts for housing demand, investment, and migration functions to indicate the housing market structure. To incorporate regional heterogeneity of the housing market, the housing model categorized the region into Seoul, Incheon, Gyeonggi, and the rest of Korea. The model measures changes in the housing market driven by policies, whereas the CGE model estimates the macroeconomic effects of changes in economic growth and housing demand. The analysis is based on thirteen industries that focus on housing construction and housing services for each region. The simulation allows policy makers to determine which measures should be prioritized to manage the amount of unsold residential inventory considering the economic impact. A 10% decrease in the acquisition tax could cause a reduction in GDP by 0.005%, whereas a 10% decrease in the transfer income tax may not affect GDP at all. Additionally, a decrease in the market interest rate could drive an increase in GDP of 0.004%. These differences can be attributed to changes in government revenue, and these changes affect industry value-added. In terms of household expenditures, these policies have a positive impact on housing consumption ranging from 0.061% to 1.338% across the different regions. The regional discrepancy in this effectiveness could be the cause of migration, as indicated by population changes.