BIS: "Korea's House Price Increase Last Year 7 Times Higher Than Expected... Global House Price Surge Concerns"

Last Year's Average House Price Increase Rate in Developed Countries 8%
South Korea's Expected House Price Increase Rate 1.23%... Actual Increase 7.17%

[Asia Economy Reporter Kim Eunbyeol] The Bank for International Settlements (BIS) has identified "rising house prices" as a global phenomenon following the COVID-19 pandemic, expressing concerns that a sharp increase in house prices could weaken economic structures.

According to BIS's annual economic report released on the 1st, due to the COVID-19 pandemic that began in early last year, countries injected liquidity and demand for housing increased, causing house prices in developed countries to rise by an average of 8% last year. When aggregating house prices in developing countries, their average increase was around 5%.

BIS stated, "A rapid rise in house prices increases household vulnerabilities," adding, "Understanding why house prices have risen is an important factor to identify potential risks ahead." Since rapid house price increases are often supported by excessive borrowing, identifying the causes is essential to reduce financial system risks.

BIS cited the main reasons for rising house prices after the pandemic as ▲ increased housing demand due to remote work and other factors ▲ low benchmark interest rates. Although transactions plummeted during lockdowns following COVID-19, as economic activities normalized, pent-up consumption occurred in the real estate market. In particular, with the increase in remote work after COVID-19, more people sought to purchase homes, and as commuting costs decreased, people spent more on their homes, driving up house prices.

To support unstable markets and economic agents after COVID-19, central banks worldwide lowered benchmark interest rates, which also made mortgage loans easier to obtain, pushing house prices higher. BIS explained that landlords seeking to maintain returns in a low-interest environment inevitably raised monthly rents, which in turn contributed to rising house prices.

BIS pointed out that while rising house prices can have positive short-term effects such as stimulating consumption, in the medium to long term, they could cause the economy to sharply decline. BIS noted, "Especially if many houses were purchased with loans and prices surged rapidly, this could soon increase downward economic pressures."

[Image source=Yonhap News]

The phenomenon of rising house prices during crises has occurred before. However, BIS assessed that house prices surged even more than expected during the COVID-19 crisis. Since the actual increase in house prices last year far exceeded estimates based on past trends such as rent and interest rate movements, there is a high possibility of a bubble in the real estate market.

According to BIS analysis, South Korea's house prices were estimated to rise by 1.23% last year but actually increased by 7.17%, recording an average rise of over 7%. This is more than seven times higher than the estimated increase based on past trends.

The country with the highest house price increase last year was New Zealand (14.63%), with a rise more than three times the expected 4.16%. Russia (13.98%), Canada (11.62%), Denmark (10.05%), and the United States (9.20%) also showed high levels of house price increases.

Economic experts also warn that if the rise in house prices is excessively high, the likelihood of a bubble bursting increases. Bloomberg recently reported, based on data from the Organisation for Economic Co-operation and Development (OECD) and BIS, that major countries are showing bubble warnings in house prices at levels not seen since the global financial crisis.

The Price-to-Income Ratio (PIR) calculated by the OECD showed New Zealand at 211.1, about twice the long-term average of 100. The ratio of house prices to rental yields also reached 166.6, with a nominal house price increase rate of 14.5%. Canada, Sweden, Norway, the United Kingdom, Denmark, the United States, Belgium, Austria, and France were also ranked in the top 10. South Korea's PIR was 60.7, significantly below the long-term average of 100, placing it 19th in the house price bubble ranking.

Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki warned again on the 30th of last month that "Seoul house prices are likely overvalued, exceeding long-term trends," signaling the possibility of a price decline following his early June warning. Citing the Financial Stability Report released by the Bank of Korea on the 22nd, he forecasted at the real estate market inspection meeting of related ministers that "Although there is a short-term rise in housing prices disconnected from income, excessive leverage will increasingly act as a downward risk to housing prices."

This content was produced with the assistance of AI translation services.