IMF Warning on Korean House Price Drop: "3%p Interest Rate Rise Leads to 5% Housing Price Decline Over 2 Years"

[Asia Economy Reporter Jeong Hyunjin] The International Monetary Fund (IMF) has warned that South Korea's real estate prices, which surged during the COVID-19 pandemic, could sharply decline due to future market price adjustments and interest rate hikes. It predicted that South Korean housing prices could fall by about 10 percentage points by the end of this year compared to the end of 2019, before the pandemic began.

[Image source=Yonhap News]

In a report titled "Housing Market Stability and Affordability in the Asia-Pacific Region," posted on its website the day before, the IMF stated that from the fourth quarter of 2019 to the fourth quarter of last year, South Korea's real housing price increase rate approached 20%, ranking third highest among Asia-Pacific countries after New Zealand and Australia.

The IMF analyzed that housing prices have been cooling rapidly as the post-pandemic period begins. As of the fourth quarter of last year, South Korea's housing price growth rate is expected to decline by 10 percentage points over the next four quarters (one year). Among other Asia-Pacific countries, New Zealand is expected to see a 20 percentage point drop, and Australia a 10 percentage point drop during the same period.

The issue is the interest rate hikes that have continued since the beginning of this year. The IMF stated, "The data underlying this analysis are mostly from the fourth quarter of last year when interest rates were still low in most Asia-Pacific countries," adding, "High interest rates reduce housing price increases, so future rate hikes will increase the downside risk to housing prices."

Regarding the impact of interest rate hikes on housing prices, the IMF analyzed, "In advanced countries within the Asia-Pacific region, a 300 basis point (1bp = 0.01 percentage point) interest rate increase will reduce housing price growth by more than 5% over the next eight quarters (two years)." It forecasted that a 3 percentage point rate hike over the next four quarters (one year) would lower housing price growth by about 2%.

The Bank of Korea has raised its benchmark interest rate from 1.0% to 3.25% this year. The IMF pointed out, "The price surge in advanced Asia-Pacific countries during the pandemic was driven by demand and supply factors unique to each country, along with low mortgage rates resulting from central banks' accommodative monetary policies," adding, "This caused significant price mismatches compared to historical price trends and led to considerable downside risks to housing prices of 5-20% in some countries."

The IMF noted that some Asia-Pacific economies have high household debt ratios relative to their gross domestic product (GDP), which, combined with housing market downturns and high interest rates, could weaken financial systems. It cited South Korea, Australia, and New Zealand as representative countries.

According to the IMF, the cycle with the largest housing price decline in South Korea was from 1991 to 1996. At that time, South Korea's housing prices fell for 22 consecutive quarters after peaking in the second quarter of 1991, dropping 33.7% by the third quarter of 1996.

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