House prices, Bank lending, Price run-up in housing markets, Korean housing markets,

We examine the behavior of broker quotes in Korean housing markets by comparing the Kookmin Bank apartment (a condominium in a high- rise residential building) price index, a broker quote based apartment price index, and a repeat sales apartment price index that we built using transaction prices, which have become available since January 2006. Broker quotes may differ from actual prices depending on the housing market conditions. Specifically, we test the hypotheses: (1) price increases shown by the broker quote based apartment price index are greater than those shown by the repeat sales apartment price index in an up market; and (2) the broker quote based price index shows a far less price reduction than the repeat sales price index in a down market. We find that indeed in a down market, the broker quote based price index shows far less price reduction than the repeat sales price index (5.75%-8.07%). However, the broker quote based price index does not distort the prices in an up market, where trading volumes are high. It appears that the price inflation in the broker quotes rises as the transaction volume drops. While broker quotes are substantially higher than transaction prices in a down market, the broker sentiment, which is a qualitative assessment of market conditions, appears to be more in line with transaction prices. We have also documented that the broker quote based index reaches its peak about two months after the peak of the repeat sales based index. Finally, broker quotes are smooth in comparison to transaction prices and they are smoothed more in a down market than an up market. Our results suggest that an optimistic view of broker quotes is problematic only in down markets where trading volumes are limited. The price inflation in broker quotes is a risk to the financial system in a market with only a broker quote based index in that it overstates the collateral values underlying mortgage loans in a down market.