[Insight & Opinion] Something More Important Than Interest Rates Has Emerged in the Housing Market

Chae Sangwook, CEO of Connected Ground

The real estate market in 2023 is truly strange. Interest rates remain high, and housing prices are at historically high levels, yet prices recovered by +10% in Seoul and +2% in metropolitan cities in the first half of the year. Despite the Debt Service Ratio (DSR) remaining unchanged and interest rates not decreasing, housing loans increased, turning the market around. What has changed to cause this phenomenon?

Last year, amid an unprecedented pace of interest rate hikes in Korea, the total household DSR reached 40.6% in the fourth quarter, increasing the burden of principal and interest repayments. The government-set household loan limit DSR of 40% was surpassed, theoretically making additional loans impossible. Under these circumstances, housing demand shrank to about one-tenth of the usual level in Seoul. There were many months with fewer than 1,000 transactions, which, considering Seoul’s approximately 3.7 million housing units, meant a monthly transaction rate of only 0.025%, an absurdly low level.

Given this situation, the government launched the ‘Special BoGeumjari Loan’ worth 44 trillion won on January 30 this year to revive housing demand. Within just nine days, applications reached 10 trillion won, marking the largest loan demand in history. The special loan’s feature is that it bypasses the DSR application, allowing household loans to increase.

Interest rates are a system, and the special loan is a program. In economic policy, a program means micro-level intervention in a specific asset market to directly influence it. But what happens if the micro-level intervention is on a macro scale? Stanley Druckenmiller, famous for managing George Soros’s Quantum Fund, said at the end of 2022 that the U.S. bond market has lost its function as an economic indicator for nearly 10 years due to manipulation by the Federal Reserve (Fed). When the Federal Reserve Board (FRB) implemented the second (2010) and third (2012) rounds of Quantitative Easing (QE), purchasing bonds with maturities of 10 years worth trillions of won, interest rates were artificially lowered and bond prices rose. He criticized that this prevented the bond market from showing its inherent characteristics properly.

In the Korean real estate market, there had been no program at the level of the special loan until the end of 2022, when the third-ever hard landing in real estate history was planned and implemented this year, achieving the policy goal of market stabilization. Although the market did not revive solely because of the special loan, it is well known that the special loan is the indicator showing the highest correlation when comparing household loan trends and housing price trends on the same scale. Therefore, if the market continues to shrink next year or later, there is an expectation that another special loan worth tens of trillions of won could be created, increasing risk appetite for housing and fostering the belief that the government will intervene to rescue the market if it collapses. This may be similar to what happened in the U.S. bond market between 2010 and 2012.

Frank Borman, an astronaut and former CEO of Eastern Airlines in the U.S., once said, "Capitalism without bankruptcy is like Christianity without hell," criticizing active intervention in the market’s natural adjustment function. This was said as a lesson from Japan’s 1990s crisis, which was caused by direct government intervention. Now, just months before 2024, the fate of the housing market depends not on interest rates, households, or housing suppliers, but on whether the government executes the special loan program, signaling the market’s impending end.

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