Interest Rate +1%p → Apartment Prices Fall 5.2%... Interest Rates Burst the Bubble

KRIHS Report on 'Liquidity's Impact on the Housing Market'
"Interest Rates and Liquidity Critically Affect Seoul and Metropolitan Area Housing Prices"
"Main Cause of Bubble Collapse Overseas... Need to Prepare for Soft Landing"

Photo by Asia Economy

Interest rates and liquidity are the main causes of housing market bubbles and collapses, with particularly significant impacts on Seoul and the metropolitan area. It was analyzed that a 1 percentage point (p) increase in interest rates can cause apartment sale prices to drop by up to 5.2%.

On the 5th, Hwang Gwan-seok, a senior researcher at the Real Estate Market Research Center of the Korea Research Institute for Human Settlements, revealed this through the 'Land Policy Brief - The Impact of Liquidity on the Housing Market and Implications' published that day, analyzing the relationship between interest rates and liquidity indicators, and their effects on the housing market.

Using a Structural Vector Autoregression (Structural VAR) model, Senior Researcher Hwang analyzed the impact of liquidity indicators such as interest rates and money supply on housing prices, finding that interest rates and money supply indicators have a statistically significant effect on the housing market.

Source: Korea Research Institute for Human Settlements

A 1 percentage point increase in interest rates negatively affects the national economy, including private consumption and GDP, and is analyzed to cause apartment sale prices to fall by up to 5.2% after 15 months (approximately 1.7% annually).

Additionally, a 10% increase in money supply was found to raise apartment sale prices by up to 1.4% after 13 months, with the effect lasting for a considerable period.

Interest rates and liquidity (M1, M2, household loans, mortgage loans) were found to have statistically significant impacts on the housing market, with regional effects ranked as Seoul > metropolitan area > provincial metropolitan cities.

Looking at overseas real estate market bubble cases (Sweden, Finland, Japan, United States), a commonality is confirmed that interest rates and liquidity were major causes of bubble formation and collapse.

These regions shared common factors in bubble formation such as expanded liquidity supply, increased demand for real estate, and inadequate risk management, while the bubble collapse process was characterized by rapid interest rate hikes and monetary tightening policies.

In the current context of an established interest rate reduction trend, there are calls for a flexible approach to ensure a soft landing of the housing market.

Senior Researcher Hwang stated, "Currently, Korea is experiencing elevated risk indicators for housing prices due to low interest rates and liquidity expansion after COVID-19, showing a phase shift (expansion → slowdown) since the first quarter of 2022. Discussions about the possibility of a hard landing in the real estate market due to rapid interest rate hikes and monetary tightening are emerging," adding, "It is necessary to proactively prepare and respond with housing market volatility risk management measures such as a Housing Reserve Bank (tentative name), housing finance refinancing, and support systems for the house-poor."

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