Taking a Break Is Also an Investment in the Era of High Interest Rates [Insight & Opinion]

The Real Estate Market Faces Uncertainty Amid Rising Interest Rates
DSR Restrictions and Political Variables Heighten Caution
Patience Is Needed as Investment Becomes More Challenging

Recently, as the yield on the U.S. 10-year Treasury bond has risen sharply, tension is spreading in the domestic real estate market. Just a month ago, the U.S. 10-year yield was around 4.2~4.3%, but it has recently surged to nearly 5%. Similarly, the Korean 10-year government bond yield has quickly risen from about 3.9% to 4.3%. Since the rise in market interest rates also affects loan product rates such as jeonse (long-term deposit lease) and mortgage loans, the real estate market is tightening again amid the changed macroeconomic environment in October.

In this year’s bullish market atmosphere, the transaction volume in Seoul rebounded, but it is highly likely that the volume will fall below 3,000 cases in October, down from 3,800 in August and 3,200 in September. Until September, loan products that could bypass DSR (Debt Service Ratio), such as special BoGeumjari loans and 50-year maturity mortgages, were offered, acting as a factor expanding demand in the market. However, this changed starting in October.

Moreover, as the country enters the general election mode in preparation for the 2024 elections, political variables have also emerged. Naturally, political, economic, and financial uncertainties have increased in the market, leading to a wait-and-see stance, which is reflected in various indicators and statistics.

If the market enters a wait-and-see phase, what indicators should be closely watched in the real estate market going forward? Probably the DSR (Debt Service Ratio), which was introduced to domestic households from 2022. DSR is not about the total loan amount but is determined by the structure of loan balance * loan interest rate / loan maturity. For example, even if loans increase, DSR rises; but even if loans decrease, if interest rates rise more sharply, DSR increases. Also, extending the loan maturity reduces the annual principal and interest burden, thus lowering the DSR. From this perspective, the current phase of rising interest rates will act as a factor increasing DSR, which will significantly suppress housing demand among domestic households. In many ways, the market is likely to enter another cooling period.

Korea’s officetel cap rate (capitalization rate) is 4.2%, which is lower than the commercial real estate loan interest rate. Currently, borrowing to purchase commercial real estate does not help from a cash flow perspective. The monthly rent-to-jeonse conversion rate in Seoul is also 4.8%, and since the sales price is twice the jeonse price, the cap rate for Seoul housing is about 2.4%. In this situation, real estate must be purchased with the expectation of capital gains rather than cash flow. The higher interest rates increase financing and holding costs, thereby lowering expected returns. Most past investment strategies ultimately worked as asset price gains for real estate holders, as falling interest rates led to simultaneous rises in jeonse prices and sales prices. However, the current rise in interest rates is somewhat different. While interpretations vary, no one is confidently saying that interest rates will return to ‘zero.’ In any case, a high level of interest rates must be endured for the time being.

In this high-interest-rate environment, where loan demand is suppressed by DSR and political and economic uncertainties are increasing, Korean real estate has become a very difficult investment target. When things are too difficult and complicated, taking a break is also good. As the saying goes, cash is also an investment, so rather than rushing to buy a house, it is time to have the patience to wait a little.

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