[Interest Rate Hike] Housing Price Decline Reversal? "Supply Expansion and Tax Relief Are Variables"

Impact of Interest Rate Hikes on the Real Estate Market

As the Bank of Korea has begun to actively raise interest rates for the first time in 15 months, attention is focused on how this will affect the real estate market, which has been experiencing a boom. In a simplistic view, interest rate hikes tend to suppress demand in the housing market due to the high leverage dependency on loans typical of real estate investment. However, despite this recent increase, interest rates remain significantly lower compared to the past, and the supply-demand imbalance in the housing market continues, leading to a prevailing assessment that the impact on soaring house prices will be limited.

According to industry sources on the 26th, there were two previous periods of interest rate hikes in the 2000s, but these did not significantly affect house prices. During the first hike period from October 2005 to August 2008, interest rates were raised eight times, increasing the base rate from 3.25% to 5.25%, a 2 percentage point rise. However, during the same period, the nationwide apartment sales price index (based on 100 in June 2020) rose from 57.7 to 73.3, an increase of 27%. Similarly, during the second hike period from July 2010 to June 2011, when rates were raised five times from 2.00% to 3.25%, the sales price index increased from 74.2 to 78.7. This shows that rising interest rates do not necessarily cause house price graphs to trend downward.

Ko Joon-seok, an adjunct professor at Dongguk University Law School, stated, "While interest rate hikes may have a psychological impact, they will not have a real effect on the real estate market." He explained that although interest rate increases do exert downward pressure on house prices, the current real estate market is more heavily influenced by other factors such as supply shortages and deregulation than by interest rates.

Professor Ko pointed out that current regulations on real estate-related loans are already stringent, and housing demanders are managing risks accordingly. He said, "Since loan-to-value ratios (LTV) and debt service ratios (DSR) are already controlled, investment capacity does not change due to interest rates," adding, "A 0.25 percentage point increase in the base rate is not a factor that can reverse house prices downward."

Lee Chang-moo, a professor in the Department of Urban Engineering at Hanyang University, also expressed skepticism that a 0.25 percentage point increase could trigger a decline in house prices, mentioning the potential divergence between the base rate and mortgage loan rates. Just as mortgage rates did not fall when the base rate was lowered in the past, it cannot be assumed that mortgage rates will necessarily rise when the base rate increases.

Experts agreed that the key variables currently affecting house prices are ‘supply’ and ‘tax regulations.’ Professor Ko said, "The current surge in real estate prices is largely due to supply-demand mismatches," and emphasized, "Marketable properties that can appear immediately should be encouraged through tax relief." He added, "Easing comprehensive real estate taxes will stabilize the jeonse (long-term lease) market, and relaxing capital gains taxes will ease the sales market."

However, there are counterarguments that the interest rate hike will dampen transactions and halt the price increase trend. Ham Young-jik, head of the Zigbang Big Data Lab, said, "As interest burdens increase, home purchases and asset investments financed by low-interest borrowing will be restricted," adding, "If investment demand decreases, housing transaction volumes will decline, and the pace of price increases may slow."