[Interest Rate Hike] Accelerated Decline in Real Estate Demand... Worsening Conditions for Stock Market Fund Flows

Bank of Korea Raises Base Interest Rate to 1.25%
Real Estate Contraction Inevitable... Seoul Stalls for 9th Week
KOSPI Also Widens Intraday Decline to Over 1%

Lee Ju-yeol, Governor of the Bank of Korea, is striking the gavel at the Monetary Policy Committee plenary meeting held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 14th.
[Photo by Yonhap News]

The Bank of Korea's interest rate hike on the 14th is expected to act as a negative factor on asset markets such as real estate and the stock market, which are already shaky. Although the rate hike was a foregone conclusion due to inflation caused by ultra-low interest rates and the increase in household debt, it is anticipated that in the real estate market, the investment demand leveraging leverage as well as the contraction of actual demand due to increased interest burden will accelerate. Concerns are also emerging that the stock market's fund supply and demand conditions will worsen further due to the steep interest rate hike trend.

Purchase Abandonment Due to Interest Burden... House Price Decline Likely to Spread

In the real estate industry, there are forecasts that the interest rate hike could further deepen the weakening of buying sentiment and the slowdown in house price increases. As the base rate rises, the interest rates on mortgage loans and credit loans from commercial banks will also rise sequentially, weakening the buying sentiment of actual demanders and increasing the likelihood that multi-homeowners burdened by interest will sell their houses.

In the real estate market, the price increase has already slowed and buying demand sharply contracted since the end of last year due to government loan regulations and other factors. Therefore, this rate hike is analyzed to accelerate such phenomena. According to statistics released by the Korea Real Estate Board on the same day, Seoul's apartment sales supply-demand index has fallen for nine consecutive weeks since the second week of November last year, recording 92.0 this week, the lowest in about 2 years and 5 months. This index is based on 100, and a figure below this means that the selling pressure is greater than the buying pressure.

Among existing homeowners and prospective buyers, voices expressing burden are increasing, saying "only the common people’s backs are being broken" due to successive rate hikes. A homeowner A (from Nowon-gu, Seoul) said, "I looked into loans to move to a larger house, but I would have to repay half of my monthly income," adding, "I have practically given up due to the interest rate hike."

Investment products other than apartments, such as commercial buildings or officetels, which are sensitive to interest rate changes, are also expected to be inevitably affected. However, in areas like Gangnam or newly built properties where there is strong waiting demand, purchases are expected to continue, leading to increased polarization by region and product type.

Ham Young-jin, head of Zigbang Big Data Lab, explained, "The interest rate hike and credit contraction will increase household interest and debt repayment burdens and weaken demanders' risk appetite," adding, "Ultimately, this is expected to lead to cautious real estate purchase demand, a slowdown in asset price increases, a decrease in transaction volume, and market polarization."

Negative Factors for the Stock Market as Well: "Concerns Over Supply and Demand"

The stock market is also facing concerns over worsening fund supply and demand due to the base rate hike.

Lee Seung-woo, center head at Eugene Investment & Securities, said, "Although the dominant view was that rates would rise until January this year, the rate hike is certainly a burden on the stock market," adding, "If the U.S. Federal Reserve (Fed) adopts a more hawkish stance in the future, it will act as an additional variable for the domestic stock market."

Following the announcement of the base rate hike on this day, the stock market showed weakness. The KOSPI opened at 2,937.61, down 0.83% (24.48 points) from the previous day, and widened its decline to the 1% range after 10 a.m., when the rate hike was announced. The KOSDAQ also failed to escape a 1% decline from the start of trading.

Moreover, there are forecasts that the U.S. Federal Reserve (Fed) will implement four rate hikes this year, raising concerns that the stock market situation will worsen further. In fact, every time news related to Fed rate hikes has emerged, the domestic stock market has been shaken. After the release of the Federal Open Market Committee (FOMC) minutes last month, which hinted at rate hikes and quantitative tightening, the KOSPI fell 1.18% and 1.13% on the 5th and 6th respectively. The KOSDAQ also dropped 2.14% and 2.90% during the same period.

Lee predicted, "Not only the rate hike but also the upcoming large-scale IPOs such as LG Energy Solution could cause supply and demand issues in the domestic stock market in the short term."