Bank of Korea: "If interest rates rise, real estate sales may surge... housing prices could fall" (Comprehensive)

The day after the government's announcement of the 'Housing Market Stabilization Plan,' on the 14th, a price list of nearby apartments was posted at a real estate agency office in Songpa-gu, Seoul. Photo by Kim Hyun-min kimhyun81@

원본보기 아이콘

[Asia Economy Reporters Minyoung Kim, Sehee Jang, Taemin Ryu] The Bank of Korea has warned of a potential adjustment in housing prices. With the base interest rate expected to rise in the future, there may be movements to sell real assets, which could lead to a correction in housing prices. Signs of price declines are already appearing in various parts of the market.

◆ Korea’s real estate accounts for 64% of total assets = The Bank of Korea’s warning that housing prices are excessively high compared to income is due to the significantly larger proportion of real estate in total assets compared to other countries. According to the ‘December 2021 Financial Stability Report’ released by the Bank of Korea on the 23rd, the proportion of real assets to total assets in Korea is 64%, much higher than major countries such as the United States (29%) and Japan (38%). The number of high-risk households in Korea also surged from 300,000 in 2018 to 400,000 at the end of last year. Considering this situation, the shock caused by a future housing price adjustment phase will be correspondingly greater.

The Bank of Korea emphasized, "Considering the high proportion of real asset holdings by Korean households and the increase in high-risk households, household real income could decrease significantly," adding, "There is a possibility that securing liquidity through the sale of real assets could lead to a housing price adjustment."

The Bank of Korea mentioned the possibility of a correction following the peak in real estate prices because if the base interest rate hikes in major countries, including Korea, coincide, the shock to economic agents could be greater. At the end of September, domestic housing finance stood at 1,667.1 trillion won, accounting for 82.5% of nominal GDP, a significant increase from 72.8% at the end of 2019.

◆ Signs of price declines appearing across the market = Concerns about risks due to rising interest rates are already being detected in various parts of the market. With government loan regulations combined with rising interest rates, buying demand in the market is shrinking, and price decline movements are becoming more pronounced. The government’s tightening of financial channels has created a situation where buyers want to purchase but cannot, leading to a mood of ‘disappearance of buying demand → transaction cliff → accumulation of listings → price decline.’ This trend is especially clear in the outer areas of Seoul and Gyeonggi Province, where mid- to low-priced apartment complexes with high loan dependence are concentrated. According to housing statistics released by the Ministry of Land, Infrastructure and Transport, the number of sales transactions in the metropolitan area decreased by 14.1%, from 37,225 to 31,982, and in Seoul by 15.0%, from 9,584 to 8,147.

As buying demand cools, the proportion of apartment purchases by the 20-30 age group, which had driven panic buying in the Gyeonggi and Incheon areas, has also sharply dropped. According to the Korea Real Estate Board’s data on apartment sales transactions by buyer age group, the share of 20-30-year-olds purchasing apartments in the metropolitan area (Seoul, Gyeonggi, Incheon) was 35.6% in October, down 3.7 percentage points from 39.3% the previous month.

With real demand buyers halting their purchasing, the market is experiencing not only transaction stagnation but also a continuous accumulation of listings. According to Apartment Real Transaction Data (Asil), a real estate big data company, the number of apartment listings in Gyeonggi Province reached 85,178, an increase of 27,134 (46.7%) compared to 58,044 three months earlier. During the same period, apartment listings in Incheon also rose by 6,518 (58.9%), from 11,051 to 17,569.

Price-decline transactions, where prices are lower than previous transactions, are also being detected in various locations. According to the Ministry of Land, Infrastructure and Transport’s real transaction disclosure system, a 189㎡ (exclusive area) unit in ‘Songdo Poonglim I-One Complex 6’ in Yeonsu-gu, Songdo-dong, was sold for 1.4 billion won on the 12th of last month. This is 200 million won lower than the peak price of 1.6 billion won recorded in August, a drop of 200 million won over three months. A 59.9㎡ unit in the nearby ‘Songdo The Sharp Central City’ was sold for 750 million won on the 1st, down 70 million won from the previous peak price of 820 million won in September. A 96㎡ unit in Hwaseong Dongtan Station Central Yemi-ji was sold for 1 billion won on the 10th, 170 million won lower than the peak price of 1.17 billion won in October.

If the current rapid rise in housing prices continues, the interest burden from rate hikes could be offset by the increased home values. However, if a housing price adjustment materializes as warned by the Bank of Korea, the industry is concerned that the risk of asset collapse in the real estate market cannot be ruled out.

However, the Bank of Korea analyzed that despite a housing price adjustment, the impact on the financial sector would be limited. This is because the recent economic recovery trend continues and the loan-to-value ratio (LTV) for household mortgage loans remains low at 40.1%. Lee Sang-hyung, Deputy Governor of the Bank of Korea, said, "The current LTV ratio is maintained at a considerably low level, and financial institutions’ loss absorption capacity is also relatively good."

In this regard, Professor Ha Jun-kyung of Hanyang University’s Department of Economics also stated, "If housing prices rise excessively compared to income, downside risks should be considered greater." He added, "Real estate prices are more likely to respond with stability or downward movement rather than upward. However, this may vary depending on the degree of loan tightening by financial authorities."

© The Asia Business Daily(www.asiae.co.kr). All rights reserved.