[Opinion] What Are the Variables in the Housing Market in the Second Half of the Year?

Chaesangwook, CEO of Four Commas

As of February 2023, the actual transaction index for housing was announced. While the weekly trend continued to decline, the monthly actual transaction index showed a rebound. Seoul's actual transaction index rose by 1.24% from 141.3 in December 2022 to 143.1 in January, and increased by 1.85% to 145.7 in February. March also indicates an upward trend. The nationwide apartment actual transaction index rebounded by 1.08% to 117.6 in February 2023. It is clear that the rebound in February and March is being reflected in actual transactions.

Of course, regarding weekly price trends, as of mid-April 2023, the cumulative decline stands at -5.48% nationwide, -6.29% in the metropolitan area, and -4.01% in Seoul, showing a continuous downward trend. The drop in jeonse (long-term lease) prices is even larger, with -8.41% nationwide and -11.04% in the metropolitan area. The differences between these two statistics are one of the reasons why perceptions of the situation vary.

If the actual transaction index explains the market more realistically, it is necessary to find the reasons why the atmosphere now differs from that of December 2022, when the decline was steepest, and to observe whether this trend will continue. The first reason is that the domestic and international interest rate hike rally has come to an end, and market interest rates have lowered in anticipation of this. Fundamentally, interest rates act inversely to asset prices. In real estate, assuming rent remains the same and investors’ required rates of return are based on interest rates, a 50 basis point increase in the benchmark interest rate corresponds to a 12-15% decline in asset prices. For example, with an annual rent of 24 million KRW at 4.0%, the asset price is 600 million KRW, whereas at 4.5%, it is about 530 million KRW. If the required rate of return rises to 5.0%, the price drops to 480 million KRW, which is a 20% decline. However, the required rate of return does not necessarily move in exact step with market interest rates but should be viewed as a long-term trend.

Why are there differing forecasts for the housing market in the second half of the year? Those who believe the market has bottomed out and will turn bullish emphasize interest rates. If market interest rates are falling and expected to fall further, the denominator shrinks, increasing the likelihood of rising transaction prices. Conversely, those anticipating a slowdown in the second half focus on growth rates. They expect a slowdown in rent growth due to a PF (project financing) crisis or other factors causing an economic downturn, which would negatively impact transaction prices.

However, it seems that the decline in South Korea’s growth rate has not yet been fully reflected. The Bank of Korea forecasts domestic GDP growth to fall below 1.6% this year. The market is more concerned, expecting it to be below 1.1%, and some hold extremely conservative views, anticipating less than 1.0%. If an economic slowdown occurs, it will burden incomes, leading to slower growth and a likely contraction in the market, creating opposing views.

In 2023, Korean households must consider various variables including macroeconomic factors, the housing market, interest rates, and growth rates when making decisions. If only one statistic is to be considered, the household loan statistics published monthly by the Financial Services Commission are recommended. Household loans increase when people decide to buy homes and start borrowing more. Despite the rebound in the actual transaction index, households have responded conservatively, with a decrease of about 18 trillion KRW as of March 2023. This indicates that the market is still viewed cautiously. For households to shift from conservative to aggressive responses in the second half of the year, solid evidence is needed across several areas including growth rates, interest rates, resolution of unsold housing, and the economy.