[Insight & Opinion] The Role of Banks and the Plight of Ordinary People Suffering Under the Onslaught of High Interest Rates

With the Federal Reserve's (Fed) 0.5 percentage point rate hike in December, the final benchmark interest rate in the U.S. for this year reached 4.5%. The possibility of continued tightening by the Fed next year is gaining weight, deepening concerns for the global economy.

While the interest rate gap between Korea and the U.S. has widened, it is fortunate that the financial authorities' intervention has caused deposit and loan interest rates at banks to decline, but it is too early to be complacent. In any case, commercial banks enjoyed an unprecedented boom this year. It is bittersweet to think that tens of trillions of won in profits ultimately came from the interest income earned by lending out the money citizens entrusted to banks. This contrasts sharply with the plight of ordinary people struggling with high interest rates and living costs.

The rapid interest rate hikes caused Jeonse prices to plummet. Typically, Jeonse prices and interest rates are inversely related.

When interest rates fall, Jeonse prices rise; when interest rates rise, Jeonse prices fall. I vaguely recall the days when low interest rates and abundant liquidity drove up housing prices, and gap investments?buying another house with Jeonse deposits?were popular. During the era of a 1% benchmark interest rate, many feared the Jeonse system might disappear.

As regulations on multi-homeowners tightened, landlords clearly preferred monthly rent to shift the tax burden. During the housing price surge, ordinary people had to bear the pain with their whole bodies. Since loan interest rates were low, tenants preferred Jeonse, but eventually, tenants who could not afford to raise Jeonse deposits were forced to enter the monthly rent market reluctantly.

Now, with the benchmark interest rate rising sharply, the opposite phenomenon has occurred. Tenants prefer monthly rent due to the soaring interest burden on Jeonse loans. However, the conversion rate from Jeonse to monthly rent has increased. As Jeonse loan interest rates rose, the formula of a 100 million won deposit equaling 400,000 won monthly rent has spread. Previously, the convention was 100 million won deposit equaling 300,000 won monthly rent. Fortunately, as Jeonse prices plummeted, monthly rent prices seem to have recently stopped rising. For those who bought homes with loans, many landlords may raise monthly rent to reduce the burden of loan interest.

Could this be why monthly rent transactions have surpassed Jeonse for five consecutive months? The KB Real Estate December Seoul apartment monthly rent index stands at 109.4, the highest since the statistics began in December 2015.

The impact of rapid interest rate hikes on our daily lives is formidable. Given an annual interest rate, how many years would it take for your deposit to double? Consider the Rule of 72. To double a lump sum in 10 years at a bank, the interest rate needs to be roughly 7%. If you convert that lump sum into a loan, the joy of compound interest is replaced by the borrower's pain of principal and interest repayment. To exaggerate slightly, debt grows at the speed of light. It is said that the 2030 youth generation suffers the most from soaring Jeonse loan interest rates. Therefore, the Housing and Urban Fund expanded the criteria for the ‘Butimok Jeonse Loan’?a financial product with 1-2% interest?for youth aged 19 to 34 and increased the loanable amount. However, the income criterion of an annual salary of 50 million won is still considered too low. The target for the safe conversion loan was expanded from 600 million to 900 million won. Although controversial, it is fortunate that the strict income requirements and unreasonable housing price conditions have been improved.

The problem is that there is controversy over reverse discrimination against borrowers who took out existing policy loans like the Bogeumjari Loan. With 50% of people being homeowners, the role of commercial banks is growing. If the additional interest rate added to the funding cost could be temporarily lowered to around 1%, the pain of ordinary people might lessen and warmth might spread through society.

It is already hard enough with the cold winter coming, but struggling with high interest rates doubles the pain. Special consideration for vulnerable tenants is urgently needed.

Jo Won-kyung, Professor at UNIST / Director of the Global Industry Cooperation Center

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