Housing Prices, Mortgage Payments and Savings Behavior in Taiwan: A Time Series Analysis

• Published in: Asian economic journal Vol. 17; no. 4; pp. 407 - 425
• Main Authors: Lin, Chu-Chia, Lai, Yi-Fang
• Format: Journal Article
• Language: English
• Published: Oxford, UK Blackwell Publishing Ltd 01.12.2003
• Subjects: error correction model; forced savings; housing prices
• ISSN: 1351-3958; 1467-8381
• DOI: 10.1111/j.1467-8381.2003.00193.x

After reaching its peak at the year of 1987, the saving rate of Taiwan dropped quickly in the late 1980s. At the same time, the real average housing prices in Taiwan had increased almost three times from 1987 to 1990. Why did the savings rate in Taiwan drop so quickly after 1987? Does it relate to the dramatic increase in housing prices? Although it has been confirmed that there is a negative wealth effect of housing price appreciation on savings, the estimated wealth effect on savings could be biased if the effect of mortgage payment (also known as forced savings) on saving is neglected. Applying quarterly data from 1981 to 2000 in Taiwan, we employ a time series analysis to compare two saving models, the traditional one and the one with forced saving. As we expected, the negative wealth effect of housing price appreciation on saving is smaller in the forced saving model than in the traditional saving model. By the estimated error correction models (ECMs), ignoring the impact of housing price appreciation on forced saving, the speed of short‐run adjustment in total saving would be significantly slower. For forecasting purposes, the forecast errors in ECM of the forced saving model are smaller than that in the total savings model.