Lee Ju-yeol, Governor of the Bank of Korea, Hints at Interest Rate Hike Within the Year
"Sudden Sharp Rate Increase Unrealistic... Difficult to Break Market Uptrend"
Lee Ju-yeol, Governor of the Bank of Korea, is speaking at the Monetary Policy Direction press conference held at the Bank of Korea in Jung-gu, Seoul on the 27th of last month. (Photo by Yonhap News)
[Asia Economy Reporter Ryu Tae-min] With Lee Ju-yeol, Governor of the Bank of Korea, hinting at a base interest rate hike within the year, attention is focused on whether the soaring real estate market can stabilize in the second half of the year.
On the 11th, Governor Lee stated, "If our economy is expected to continue a solid recovery, the current accommodative monetary policy should be orderly normalized from an appropriate time in the future." Although he mentioned considering variables such as the speed of economic recovery and the risk of accumulated financial imbalances, this was interpreted to mean that the current base interest rate of 0.50% could be raised long-term to the pre-COVID-19 level of 1.25%. However, since Governor Lee also said, "We will communicate sufficiently with economic agents in advance so that they can prepare without shock," the prevailing view is that a rapid spike in the base interest rate in a short period is unlikely.
Generally, when the base interest rate rises, the principal and interest repayment burden on loans for real estate investors and buyers increases, reducing investment demand for real estate. Earlier, the Korea Research Institute for Human Settlements released a study in March stating that when interest rates rise by 1 percentage point, housing prices are expected to fall by about 0.7 percentage points annually.
However, due to the characteristics of the real estate market, various factors such as housing supply and market trends complexly influence price determination beyond just interest rates, so there is a counterargument that simply raising interest rates will not easily curb the upward trend in housing prices. There is also an expectation that the impact of interest rate hikes will be limited because the government has already implemented strong regulatory policies related to real estate loans.
Experts predict that the current upward trend in real estate prices will continue, as a slight interest rate increase alone is unlikely to stabilize the market as the government hopes. Professor Cho Joo-hyun of Konkuk University’s Department of Real Estate said, "A slight interest rate hike is unlikely to change the trend, so the upward momentum will be maintained," adding, "Supply policies and overall economic trends have a greater impact on stabilizing real estate prices than interest rates." Professor Seo Jin-hyung of Gyeongin Women’s University (President of the Korean Real Estate Society) said, "Since household loan sizes are currently very large, rapid interest rate hikes should be avoided to reduce shocks," and predicted, "Because there are concerns about supply reduction, the real estate market will not lead to a sharp decline."
On the other hand, some experts believe that the current real estate price surge could be curbed due to interest rate hikes. Park Won-gap, Senior Real Estate Specialist at KB Kookmin Bank, said, "The current rapid rise in housing prices is strongly influenced by liquidity-driven investment demand," and added, "Moreover, since most household borrowers have variable-rate loans, demand is expected to slow down as interest rates rise."
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