[Era of Ultra-High Inflation] Hidden Price Bomb 'Housing Costs'... Pressing Down on Ordinary Households' Budgets

Rising Interest Rates Increase Debt Burden and Accelerate Monthly Rent Conversion
Surging New Jeonse Contracts in August May Worsen Burden on Low-Income Households
Flaws in Inflation Statistics... "Potential Negative Impact on Economy"

‘Housing costs’ are being analyzed as a hidden trigger in the era of hyperinflation. Although housing prices, which have surged sharply in recent years, have slowed down this year, they still remain high, especially in the Seoul metropolitan area. Additionally, the burden of mortgage loan interest has increased due to successive base interest rate hikes. The proportion of monthly rent payments, which require paying housing costs every month, is rising, and from August, a large number of jeonse households whose lease renewal rights have expired will simultaneously enter the market, posing a threat to the household budgets of ordinary citizens. In particular, housing costs are not fully reflected in inflation statistics, so their actual impact on daily life is expected to be even greater.

According to the financial and real estate markets on the 7th, the rental laws introduced during the Moon Jae-in administration (Lease Renewal Right and Rent Cap System) have caused the jeonse price trend to continue rising, and recently, due to the base interest rate hikes, the burden of monthly rent and loan interest has surged, spreading housing cost distress.

The rental laws will mark two years since implementation in August, raising concerns about a possible jeonse crisis in the second half of the year. If new contracts not subject to the rent cap system increase, landlords who were previously unable to raise jeonse prices due to regulations may significantly increase rents all at once. According to Real Estate R114, since the implementation of the rental laws, jeonse prices have risen by an average of 27.69% nationwide. Calculated arithmetically, finding a new jeonse home in Seoul in the second half of the year will require an average of 126.5 million KRW more than two years ago.

The increase in monthly rent contracts, which require paying housing costs every month, is also a burden. According to an analysis by the Ministry of Land, Infrastructure and Transport, as of April, there were a total of 258,118 jeonse and monthly rent transactions nationwide, of which monthly rent accounted for 130,295 cases, more than half (50.4%). This is the result of more people turning to monthly rent as a desperate measure due to high jeonse prices and base interest rate hikes, but the average monthly rent has also sharply increased, rising from 975,000 KRW in April last year to 1,075,000 KRW in April this year in Seoul.

The problem is that this housing cost burden is not properly reflected in inflation statistics. On the surface, the US Consumer Price Index inflation rate is in the 8% range and Korea’s is in the 5% range, making it seem like Korea is doing relatively well, but the domestic index does not include owner-occupied housing costs, so it does not fully reflect housing price increases. The logic is that people living in their own homes have not increased living expenses, so it is not reflected in statistics, but this fails to properly account for the opportunity costs of people who cannot move due to skyrocketing housing prices, causing annual controversy.

In addition, there are criticisms that actual changes in jeonse and monthly rent prices are underrepresented in statistics, revealing significant gaps in housing cost statistics. The Korea Development Institute (KDI) recently pointed out that "the housing rent component of our country’s inflation index does not adequately reflect housing opportunity costs."

Ko Jong-wan, president of the Korea Asset Management Research Institute, said, "The shift from jeonse to monthly rent and the increase in interest burdens have greatly increased the burden not only on non-homeowners but also on multi-homeowners," adding, "While housing prices are likely to stabilize gradually, if the activation of reconstruction becomes a trigger for housing price instability, disposable income will decrease, which could negatively affect the economy."