"If the base interest rate rises by 1.0%p, house prices may drop up to 2.8% in 2 years"

BoK: "Downward Factors in Housing Market Slightly Prevail"

[Image source=Yonhap News]

[Asia Economy Reporter Seo So-jung] A study has found that if the base interest rate is raised by 1.0 percentage point at once, housing prices will drop by up to 0.7% after one year and up to 2.8% after two years compared to maintaining the base interest rate.

On the 3rd, the Bank of Korea stated in its "Housing Market Risk Assessment" (BOK Issue Note) report, "Looking at recent housing market conditions, both upward and downward factors are mixed, but downward factors appear to be somewhat dominant."

The base interest rate hike acts as a factor that lowers housing prices. According to the Bank of Korea’s econometric model estimates, holding other variables constant, if the base interest rate is raised by 1.0 percentage point, housing prices (nationwide standard) are expected to fall by about 0.4?0.7% after one year and 0.9?2.8% after two years compared to maintaining the base interest rate.

According to the Bank of Korea, the perception that housing prices are overvalued has recently spread, weakening expectations for further price increases. Housing prices nationwide and in Seoul have risen significantly above past averages relative to income (PIR) and rent (PRR). The "housing price gap" indicator, which shows the price ratio relative to intrinsic value, has also risen sharply recently and is at a higher level compared to major countries such as the UK, France, and Sweden.

The worsening borrowing conditions due to rising interest rates and strengthened loan regulations are also dampening purchasing demand. Household loan interest rates have risen rapidly since the second half of last year, with mortgage loan interest rates reaching 4.04% in June this year, the highest level since February 2013 (4.06%). The government has strengthened regulations on household loans, implementing a three-stage borrower-level Debt Service Ratio (DSR) regulation to manage the household loan growth rate at around 4?5%.

In South Korea, the annual household debt growth rate has consistently exceeded 5% since 2003, except in 2019 (4.0%), resulting in a significant accumulation of household debt. In this context, if borrowing conditions worsen, the impact on housing prices is likely to increase. Additionally, when the proportion of variable-rate loans is high, interest rate hikes have been found to reduce housing price growth rates more sharply.

Furthermore, the risk level of housing price declines varies by region. Areas where the housing market is oversupplied or has recently experienced significant price increases show relatively higher decline risks compared to other regions. According to the report, the order of decline risk from highest to lower includes Sejong, Daejeon, Gyeonggi, Daegu, Incheon, Busan, Jeonnam, and Seoul.

However, the sluggish housing supply, which has acted as a factor raising expectations for housing price increases, is expected to continue for a considerable period. Looking at apartment move-in volumes, one of the representative housing supply indicators, they are expected to fall below the usual levels (2017?2020) until next year. The number of housing permits and approvals, a leading indicator of housing supply, averaged 500,000 units annually from 2019 to 2021, below the long-term average of 540,000 units annually from 2007 to 2018.

While reductions in property taxes such as the holding tax are known to decrease sellers’ incentives, the report expects that if redevelopment regulations are eased, housing prices will rise in the short term. The Bank of Korea noted that if redevelopment projects accelerate mainly in the metropolitan area, housing prices in those areas will rise, and the upward trend in housing prices may spread to surrounding areas. Model analysis estimates that the spillover effect of sales prices from specific areas within the metropolitan area to other areas is about 18?33%.

Kim Dae-yong, Deputy Director of the Price Research Team at the Bank of Korea’s Research Department, said, "As the perception of housing price overvaluation spreads, and borrowing conditions worsen due to rising interest rates and strengthened loan regulations, downward pressure is expected to gradually intensify. However, since housing prices are influenced by various factors such as financing conditions, housing supply and demand, government policies, and expectations, the magnitude of the impact of interest rate hikes on housing prices may vary."

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