Concerns Raised Over Surge in 'Empty Shell Houses' as Excessively Inflowed Asset Bubble Bursts
[Asia Economy Reporters Kangwook Cho, Dongpyo Kim] As concerns over US-originated interest rate hikes spread, it is predicted that those who borrowed money "to the bone" to buy homes will be hit hard. There are also warnings that if housing prices fall, a surge in "empty shell houses"?homes sold for less than the outstanding loan balance?could occur.
According to the real estate industry on the 14th, the market expects that if interest rate hikes accelerate, apartment buyers who have maxed out their credit loans and mortgage loans, known as ‘Youngkkeunjok’ (those who borrow to the limit), will suffer the most. As interest rates rise, young people who purchased homes with loans during last year's panic buying frenzy will face a sudden increase in interest payment burdens.
According to a 2019 simulation by the Financial Supervisory Service, when borrowing 300 million KRW with a 30-year term, the monthly repayment amount increases from 1,347,000 KRW to 1,515,000 KRW?a rise of 168,000 KRW?if the interest rate goes up by 1 percentage point from 3.5% to 4.5%. This translates to an annual increase in burden of over 2 million KRW.
Professor Junseok Ko, adjunct professor at Dongguk University Law School, said, "If interest rates rise, the number of properties going to auction may increase," adding, "Youngkkeun includes not only mortgage loans but also higher-interest credit loans, so the 20s and 30s age groups could be the first to be affected by interest rate hikes."
According to Jae-young Jang, a member of the Justice Party, as of the end of February, the outstanding balance of mortgage loans at domestic banks was 593 trillion KRW, of which 68.1% were variable interest rate loans (including mixed variable rate loans). This amounts to a total of 404 trillion KRW, an increase of 53 trillion KRW compared to a year ago. The proportion of variable interest rate loans among borrowers in their 20s and 30s, who account for about 30% of the mortgage loan balance, is also as high as 68.3%, with the 20s age group reaching 72.6%. This means a significant portion of young people's mortgage loans are exposed to the risk of interest rate hikes.
When interest rates rise, borrowers' interest burdens increase, and the real estate prices that surged rapidly in a short period may also undergo correction. A more serious problem arises if housing prices fall. If the low-interest rate trend continues and the government's large-scale housing supply policy proceeds smoothly, funds that had flooded into the real estate market will shrink, and the bubble in excessively inflowed assets will deflate, increasing the risk of ‘empty shell houses’ among Youngkkeunjok.
The housing market atmosphere has already overheated, leading to claims of a "housing price peak theory." In the fourth quarter of last year, Seoul's Housing Affordability Index (HAI) recorded an all-time high of 153.4, more than 100 points higher than the national average. This is said to be similar to the levels before the housing market downturn in 2007-2008.
Jinhyung Seo, president of the Korea Real Estate Society and professor at Gyeongin Women's University, said, "Because real estate accounts for a large portion of household debt, the burden on those who borrowed to the limit will inevitably increase when interest rates rise," adding, "The most affected group will be those in their 20s and 30s, and regionally, areas outside Seoul in the metropolitan area and local regions are expected to feel the impact of interest rate hikes earlier than Seoul."
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