The present study is intended to derive the effects of the salient demographic change including aging population, low birth rates and declining population in Seoul on commercial property prices and present its implications for investment and policy.
Given the time-series variations of the varia...
The present study is intended to derive the effects of the salient demographic change including aging population, low birth rates and declining population in Seoul on commercial property prices and present its implications for investment and policy.
Given the time-series variations of the variables used in this study, a vector error correction model(VECM) is used on the grounds that the VECM is in wide use for the analysis of multiple time series data and posits a long-term balance between variables.
The results of the present analysis are explained with the impulse response function for understanding the effects and types of variables and the forecast error variance decomposition for assessing the relative importance of each variable.
The impulse response and the forecast error variance decomposition shed light on the following.
In view of the changing demographic structure, the population of Seoul continuously declined for the duration of analysis, which is highly likely to decrease the demand for commercial properties, exerting negative effects on the commercial property market across the board. Also, the declining birth rates in Seoul eventually decrease the consumption associated with childcare and thus negatively impact on the commercial property market. Meanwhile, despite its insignificant effects, the continuous growth of population aged over 65 involving the retirement of baby boomers whose asset portfolios are mostly comprised of unprofitable properties is likely to increase the demand for investment in commercial properties ensuring relatively higher returns compared to financial products.
From the perspective of macroeconomic variables, positive economic growth exerts the greatest effects on commercial property prices, increases the income levels, affordability and capital of the members of society, and boosts the demand for investment in commercial properties. Conversely, negative economic growth decreases the personal consumption expenditure and thus the intention for investment. Also, lower interest rates ease the burden on debtors or property investors, turns potential investors in commercial properties into valid investors, and raises the demand for investment in commercial properties due to the rising ROI compared to alternative investment options including the financial market contingent on interest rates. Meanwhile, falling consumer prices decrease the need for an inflation hedge characterizing the property investment, negatively impacting on the commercial property market.
The present findings have the following implications for investment decision making and policy.
First, the population of Seoul fell below 10 million as of June, 2016, and is projected to show a downward trend in parallel with the stagnating national population growth. Notably, although the population of Seoul has not declined sharply yet, the outflow of population is projected to accelerate upon completion of the new town development in the capital regions fitted with excellent settlement environment, e.g. Pyeongtaik, Dongtan and Suji. Thus, the decision making on investment in commercial properties should take into account regional inflows and outflows of population.
Second, consumption patterns have changed with the fixation of low birth rates and the increasing one- and two-person households attributable to declining marriage rates. That is, the demand for family-centered commercial facilities falls whereas those suitable for nuclear families including one- and two-person households are likely to be in high demand. Therefore, the decision on commercial property investment should be made by focusing on the properties specifically fit for the consumption patterns varying with the low birth rates.
Third, the upcoming retirement of 7.3million baby boomers in tandem with the paucity of pension income is projected to positively impact on commercial properties creating a continuous cash flow in preparation for post-retirement life. Still, considering the asset portfolio and economic capability of baby boomers, investors are likely to prefer small-scale commercial properties to large-scale ones. Also, indirect property investment products including REITs and property funds guaranteeing regular dividend payments on small investments and capital gains are likely to draw much attention.
Fourth, low interest rates are expected to be prolonged due to the global recession since the 2008 global financial crisis. Thus, the demand for investment in commercial properties will increase as it is perceived to ensure a higher ROI than financial products and a greater stability than equity investment. Yet, in that a lingering recession decreases affordability and intention to consume, future trends in post-recession economy need be considered. Likewise, the weaker inflation hedging capacity of property investment due to the prolonged stabilization of consumer prices warrants the analysis of the changing propensity to invest in the commercial property market.
Finally, unless the declining population and demographic change are considered, unsold and vacant properties ascribable to the commercial property oversupply are likely to emerge. Also, overheated commercial property market in highly populated and high-income areas owing to the lingering low interest rates and income polarization need be monitored on a continuous basis.
The present study is intended to derive the effects of the salient demographic change including aging population, low birth rates and declining population in Seoul on commercial property prices and present its implications for investment and policy.
Given the time-series variations of the variables used in this study, a vector error correction model(VECM) is used on the grounds that the VECM is in wide use for the analysis of multiple time series data and posits a long-term balance between variables.
The results of the present analysis are explained with the impulse response function for understanding the effects and types of variables and the forecast error variance decomposition for assessing the relative importance of each variable.
The impulse response and the forecast error variance decomposition shed light on the following.
In view of the changing demographic structure, the population of Seoul continuously declined for the duration of analysis, which is highly likely to decrease the demand for commercial properties, exerting negative effects on the commercial property market across the board. Also, the declining birth rates in Seoul eventually decrease the consumption associated with childcare and thus negatively impact on the commercial property market. Meanwhile, despite its insignificant effects, the continuous growth of population aged over 65 involving the retirement of baby boomers whose asset portfolios are mostly comprised of unprofitable properties is likely to increase the demand for investment in commercial properties ensuring relatively higher returns compared to financial products.
From the perspective of macroeconomic variables, positive economic growth exerts the greatest effects on commercial property prices, increases the income levels, affordability and capital of the members of society, and boosts the demand for investment in commercial properties. Conversely, negative economic growth decreases the personal consumption expenditure and thus the intention for investment. Also, lower interest rates ease the burden on debtors or property investors, turns potential investors in commercial properties into valid investors, and raises the demand for investment in commercial properties due to the rising ROI compared to alternative investment options including the financial market contingent on interest rates. Meanwhile, falling consumer prices decrease the need for an inflation hedge characterizing the property investment, negatively impacting on the commercial property market.
The present findings have the following implications for investment decision making and policy.
First, the population of Seoul fell below 10 million as of June, 2016, and is projected to show a downward trend in parallel with the stagnating national population growth. Notably, although the population of Seoul has not declined sharply yet, the outflow of population is projected to accelerate upon completion of the new town development in the capital regions fitted with excellent settlement environment, e.g. Pyeongtaik, Dongtan and Suji. Thus, the decision making on investment in commercial properties should take into account regional inflows and outflows of population.
Second, consumption patterns have changed with the fixation of low birth rates and the increasing one- and two-person households attributable to declining marriage rates. That is, the demand for family-centered commercial facilities falls whereas those suitable for nuclear families including one- and two-person households are likely to be in high demand. Therefore, the decision on commercial property investment should be made by focusing on the properties specifically fit for the consumption patterns varying with the low birth rates.
Third, the upcoming retirement of 7.3million baby boomers in tandem with the paucity of pension income is projected to positively impact on commercial properties creating a continuous cash flow in preparation for post-retirement life. Still, considering the asset portfolio and economic capability of baby boomers, investors are likely to prefer small-scale commercial properties to large-scale ones. Also, indirect property investment products including REITs and property funds guaranteeing regular dividend payments on small investments and capital gains are likely to draw much attention.
Fourth, low interest rates are expected to be prolonged due to the global recession since the 2008 global financial crisis. Thus, the demand for investment in commercial properties will increase as it is perceived to ensure a higher ROI than financial products and a greater stability than equity investment. Yet, in that a lingering recession decreases affordability and intention to consume, future trends in post-recession economy need be considered. Likewise, the weaker inflation hedging capacity of property investment due to the prolonged stabilization of consumer prices warrants the analysis of the changing propensity to invest in the commercial property market.
Finally, unless the declining population and demographic change are considered, unsold and vacant properties ascribable to the commercial property oversupply are likely to emerge. Also, overheated commercial property market in highly populated and high-income areas owing to the lingering low interest rates and income polarization need be monitored on a continuous basis.
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