Small and Medium Apartment Prices Hit 1.8 Billion Won, Yet Authorities Say "Inflation Is Stable" [Weekend Money]

Why Korea’s CPI Remains Low Despite Soaring Housing Prices

Only Rents Reflected in Statistics, Owner-Occupied Homes Left Out

Disagreements Over Calculation Methods and Lack of International Standards

Although there have been reports that apartment prices in Gangnam have started to adjust, the decline remains minimal compared to the previous surge. According to KB Kookmin Bank’s market data, as of January, the average price of small and mid-sized apartments in the 11 districts south of the Han River has surpassed 1.8 billion won.

There are many people who are feeling the pinch due to the steep rise in housing prices. Those who took out maximum loans are tightening their belts to meet principal and interest payments, while tenants are also struggling with rising rent. Yet, the Consumer Price Index (CPI) remains strangely subdued. Both the government and the Bank of Korea claim that “inflation is stable.”

With housing prices rising this much, why is this not reflected in inflation? Some argue that this is due to the structural features of Korea’s inflation statistics.

Inflation Statistics Are Missing 'Housing Prices'

The Seoul Metropolitan Government announced on the 23rd of last month that apartment prices in Seoul rose by 13.5% compared to the previous year, marking the highest increase since 2021 when housing prices surged sharply due to expanded liquidity during the pandemic period.

Hyungki Jung, a researcher at DS Investment & Securities Research Center, analyzed in a recent report why the CPI (Consumer Price Index) does not rise even when housing prices are surging.

The CPI is an index that shows changes in the prices of goods and services we use in daily life. If the price of ramen rises, the CPI goes up; if transportation costs fall, the CPI goes down. The issue lies in how “housing costs” are measured.

There are two major types of housing costs: rental expenses, such as jeonse or monthly rent—actual payments made by tenants—and the cost associated with living in one’s own home, known as “owner-occupied housing costs.”

The CPI announced by the National Data Office only includes rental costs. Owner-occupied housing costs are excluded. No matter how much housing prices rise, this structure means it will not be reflected in the CPI.

'Why Exclude Owner-Occupied Housing Costs?' : Disagreements on Calculation Methods and No International Standard

Post-COVID Inflation Rates (YoY) in Korea, the United States, and Europe

Owner-occupied housing costs refer to the value of money spent by people living in their own homes. For instance, if you were to sell your home and rent it out, the rent you could collect or the investment return you could get elsewhere would be the “opportunity cost” you are forgoing. Though not visible, this is a real cost.

This concept may feel unfamiliar, and understandably so—there’s no actual outflow of cash. Therefore, each country incorporates this cost into inflation statistics differently.

The United States and Japan estimate “how much would it cost to rent my own home” and include that in the CPI (the rental equivalence approach). Canada and Australia directly reflect the purchase price when buying a home (the acquisition approach). The United Kingdom and New Zealand measure actual cash outflows such as mortgage interest (the user cost approach).

The National Data Office cites three main reasons for excluding owner-occupied housing costs from the CPI: First, it cannot be observed directly and thus requires estimation; second, there is no internationally agreed measurement standard; and third, because such statistics are linked to legislation such as pensions, any change would have significant social impact.

The Illusion Created by Excluding Owner-Occupied Housing Costs: Underestimating Inflation

According to the "Consumer Price Trends" announced by the National Data Office on the 3rd, the consumer price index for January was 118.03 (2020=100), up 2.0% compared to a year ago. The rate of increase fell from 2.4% in October and November last year to 2.3% in December, maintaining a declining trend for two consecutive months.

This structural gap became even more apparent during the period of explosive housing price increases after COVID-19. In reality, the cost of buying or renting a home in Seoul soared, but the CPI failed to capture this. As a result, there is an illusion that inflation is lower than it actually is.

Researcher Jung highlights this point: if owner-occupied housing costs are not reflected in inflation, it becomes difficult to recognize the need for tight monetary policy to ensure price stability when looking only at the CPI.

This leads to further ripple effects. The market predicts monetary policy based on the CPI. If the CPI is low, people expect “the Bank of Korea will lower interest rates.” Even though housing prices are climbing, since this is not captured in the statistics, it leads to the mistaken belief that “inflation is stable, so interest rates can be cut.”

Researcher Jung said, “There was excessive expectation for a base rate cut at the end of last year, and it appears that the failure to reflect owner-occupied housing costs in the CPI contributed to this.”

The United States Has Also Fought Over This Issue for a Long Time

However, this issue is not unique to Korea. In the United States, there has long been debate over how to include Owner’s Equivalent Rent (OER) in the CPI. OER accounts for about 40% of the U.S. CPI, a substantial proportion.

Stephen Miran, a former Fed governor, criticized OER by stating that “it responds 6 months to a year later than actual rental trends and, as it is based on survey estimates rather than actual transactions, it is unreliable.” The criticism is that an artificial figure unrelated to market reality determines 40% of the CPI.

There are also issues in the opposite direction. In the UK, where mortgage interest is included as part of housing costs, when the central bank raises rates to control inflation, paradoxically, the housing cost component rises, pushing the CPI higher. This shows that no approach is perfect, no matter which method is chosen.

The European Union began reflecting owner-occupied housing costs in its Harmonized Index of Consumer Prices (HICP) starting this year (2026), after lengthy discussions. The time may come when Korea will need to formally begin this discussion as well.

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