'Yeongkkeuljok' Shaken by Rising Interest Rates... Will Long-Term Housing Price Decline Begin?

If Interest Rate Hikes Continue, 'Yeongkkeuljok' Hit Hard
Recent Surge in Quick Sales and Price Stagnation in Real Estate Market
Experts Also Predict 'Price Rebound'

Seoul Apgujeong Hyundai Apartment / Photo by Hyunmin Kim kimhyun81@

With the growing perception that housing prices have peaked, rising loan burdens, and the U.S. signaling interest rate hikes, expectations for a decline in housing prices are increasing in the domestic real estate market. Apartment prices have entered a full-fledged downward trend, and if interest burdens increase due to rate hikes, those who bought homes last year by stretching their finances to the limit ('Yeongkkeul' - borrowing to the bone) are expected to suffer even more. In this case, the increase in listings on the market could lead to a prolonged decline in housing prices.

According to industry sources on the 1st, the burden on homeowners who purchased homes with loans is increasing due to continued interest rate hikes. According to the 'Weighted Average Interest Rate of Financial Institutions' statistics recently released by the Bank of Korea, the weighted average interest rate on new housing mortgage loans at deposit banks in December last year rose by 0.12 percentage points in one month to 3.63% per annum. This is the highest level in 7 years and 7 months since May 2014 (3.63%).

A Bank of Korea official explained, "The rise in benchmark interest rates such as COFIX and bank bonds has led to increases in mortgage and guarantee loan interest rates." As interest rates rise, the cost of financing increases, inevitably reducing housing demand. In fact, the real estate market in the Seoul metropolitan area has recently shown signs of inventory buildup due to decreased demand. Even in the Gangnam area, transactions have stagnated, leading to an increase in price-decreasing deals.

People in their 20s and 30s who borrowed excessively to buy homes during last year's rapid price surge are now anxious due to rising interest rates and fears of falling housing prices. The problem is that this trend may worsen. With forecasts of imminent U.S. interest rate hikes and aggressive tightening, opinions are emerging that the Bank of Korea's base rate hike timing will also accelerate.

Earlier, the U.S. Federal Reserve (Fed) held its Federal Open Market Committee (FOMC) regular meeting on the 26th of last month (local time) and effectively formalized a rate hike in March. The Fed is expected to steadily proceed with tightening measures such as tapering asset purchases, raising the base rate, and reducing holdings to respond to inflation.

If the U.S. raises rates and implements quantitative tightening (QT), the value of the dollar will rise, increasing the likelihood of capital outflows from neighboring countries like Korea. To mitigate the shock, neighboring countries will have no choice but to also raise interest rates. In fact, most experts accept the Bank of Korea's base rate hike policy as a given, with only slight differences in opinion regarding the timing of the increase.

Real estate transactions are also freezing up. According to the weekly apartment price trend released by the Korea Real Estate Board, apartment prices in Seoul fell by 0.01% compared to the previous week. This marks the first decline in 87 weeks since the fourth week of May 2020. As housing prices, which had sharply risen for several years since the Moon Jae-in administration took office, turn negative, buying sentiment is expected to contract further.

If interest rates rise during a housing price decline, it will be a direct blow to the 'Yeongkkeul' group. With the stock market recently undergoing a correction, there is also talk of an increase in 'house poor' individuals, especially among the younger generation, who struggle with loan interest payments. In peripheral areas such as Nowon-gu and Gangbuk-gu in Seoul, where 'panic buying' was common, there has been an increase in urgent sales with prices dropping by tens of millions of won or more.

However, there are also opinions that the housing price decline will be limited to partial adjustments. Eunhyung Lee, a senior researcher at the Korea Institute of Construction Policy, explained, "It is difficult to consider price declines in some areas as a natural market phenomenon," adding, "Since artificial factors such as loan regulations have played a role, once these factors are resolved, prices are likely to rebound."

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