[In the Midst of Mountains Real Estate] With Additional Interest Rate Hikes... Housing Market Slumps Deepen

September Housing Transactions Down 60% Year-on-Year

Accumulated Unsold Units - Delays in Fund Recovery

Rapid Interest Rate Hikes Increase Debt Repayment Burden

[Asia Economy Reporter Kim Min-young] As the U.S. Federal Reserve moves to raise benchmark interest rates, the Bank of Korea is also likely to raise rates further, raising concerns that the housing market in South Korea will face accelerated stagnation. Moreover, if the real estate market cooling period prolongs, it could lead not only to bankruptcies in related industries but also losses for financial institutions. The sales market is freezing up, and as unsold units accumulate, construction companies face delays in fund recovery, increasing the risk of project financing (PF) defaults.

◆Transaction and Unsold Unit Indicators at ‘Severe’ Levels= The severe condition of the real estate market is confirmed by various indicators. According to the Ministry of Land, Infrastructure and Transport, nationwide housing transactions (by reporting date) in September this year totaled 32,404 cases, down 8.8% from August (35,531 cases). Compared to one year ago (81,631 cases), it plunged by 60.3%. The cumulative transaction volume this year is 417,794 cases, a 49% decrease compared to the same period last year.

The slump in Seoul apartment transactions is beyond severe; it is at a near standstill. In September, Seoul apartment sales amounted to only 856 cases, a 77.9% drop year-on-year. This is the lowest since related statistics began being compiled in January 2006. Industry experts say that under normal market conditions, the monthly average transaction volume should be around 5,000 cases.

Signs of stagnation are also visible in the number of unsold homes. At the end of September this year, the total number of unsold homes nationwide was 41,604 units. This represents a 27.1% (8,882 units) increase compared to 32,722 units at the end of August. However, the number of unsold homes classified as “malignant” ? those unsold after completion ? was 7,189 units nationwide, a 1.9% decrease from August.

Kim Hyo-seon, Senior Real Estate Advisor at NH Nonghyup Bank’s All-Back Advisory Center, said, “Since the U.S. is likely to maintain its interest rate hike direction until next year, the existing housing market will not see demand movement unless there is a special positive factor. Demand will concentrate only in areas with good locations and clear price competitiveness, deepening polarization in the subscription market.”

With existing home transactions sluggish and unsold units increasing, demand for new construction permits has also declined. According to building permit statistics released by the Ministry of Land, Infrastructure and Transport, the permit area in the third quarter of this year was 38.894 million square meters, down 9.5% from the same period last year. This decline is due to decreases in permits for neighborhood living facilities and warehouses. The number of permitted buildings was 39,812, a 27.6% decrease compared to the same period last year.

◆Continued Interest Rate Hikes Raise Concerns Over Company Bankruptcies and PF Defaults= It seems unlikely that the cooled real estate market atmosphere will recover next year. The U.S. Federal Reserve has decided to raise the benchmark interest rate by an additional 0.7 percentage points, making further rate hikes by the Bank of Korea almost certain.

A recent report titled ‘2023 Economic and Financial Market Outlook’ published by Hana Financial Management Research Institute forecasted that rapid interest rate hikes will increase debt repayment burdens, suppress buying sentiment, and prolong the decline in real estate prices. The longer the interest rate hike period continues, the more the real estate market stagnation will coincide with concerns over a wave of related company closures. Unsold units may also accumulate further. Since subscription is essentially a form of real estate purchase, it is inevitably affected by interest rate levels. Accumulated unsold units can disrupt construction companies’ fund recovery, ultimately worsening PF defaults.

Yoon Ji-hae, Senior Researcher at Real Estate R114, said, “If transaction volumes outside the normal range persist for 1 to 2 years, brokerage offices and moving companies will face a wave of bankruptcies, and real estate prices could fall by 10 to 20%. The government needs to prepare preemptive measures such as easing the Debt Service Ratio (DSR) to ensure a soft landing for the real estate market.”