Small and Medium Apartment Prices Hit 1.8 Billion Won, Yet Authorities Say "Inflation Is Stable" [Weekend Money]

Why Korea’s CPI Remains Low Despite Soaring Housing Prices

Only Rents Reflected in Statistics, Owner-Occupied Homes Left Out

Disagreements Over Calculation Methods and Lack of International Standards

Although there has been news suggesting that apartment prices in Gangnam are starting to adjust, the decline is minimal compared to previous increases. According to KB Kookmin Bank’s price index, as of January, the average price of small and medium-sized apartments across 11 districts south of the Han River has exceeded 1.8 billion won.

Many people are complaining about the strain on their daily lives due to the sharp rise in housing prices. Those who have maximized their loans are tightening their belts to repay principal and interest, while tenants are struggling with rising rents. Yet, the Consumer Price Index (CPI) remains unusually stable. Both the government and the Bank of Korea claim that “inflation is under control.”

Why, then, has this surge in housing prices not been reflected in inflation figures? Some point to a structural characteristic of Korea’s inflation statistics as the reason.

Housing price is left out of inflation statistics

The Seoul Metropolitan Government announced on the 23rd of last month that apartment prices in Seoul rose by 13.5% compared to the previous year, marking the highest increase since 2021 when housing prices surged sharply due to expanded liquidity during the pandemic period.

Hyungki Jeong, a researcher at DS Investment & Securities Research Center, analyzed in a recent report why the CPI (Consumer Price Index) does not rise even amid a sharp increase in housing prices.

The CPI is an indicator that shows fluctuations in the prices of goods and services used in daily life. If the price of instant noodles goes up, the CPI rises; if transportation costs fall, the CPI decreases. The key issue lies in how “housing costs” are measured.

The costs associated with living in a home, or “housing costs,” can be largely divided into two categories: rental expenses such as jeonse or monthly rent, which require actual payments, and the cost of living in one’s own home, known as “owner-occupied housing cost.”

The CPI published by the National Data Office includes only rental costs such as jeonse and monthly rent. Owner-occupied housing costs are excluded. No matter how much housing prices rise, this structure means that the CPI does not reflect it.

Why exclude 'owner-occupied housing cost'? : Disagreements over calculation methods and lack of international standards

Post-COVID Inflation Rates (YoY) in Korea, the United States, and Europe

Owner-occupied housing cost refers to the value of money spent by someone living in their own home. For example, if you sold your house and rented it out, the rent you could receive, or the returns you might earn by investing that money elsewhere, represent the “opportunity cost” you give up. Though invisible, it is a tangible expense.

This concept may seem unfamiliar because it is not a direct cash outflow. As a result, each country incorporates this cost into inflation in different ways.

The United States and Japan estimate how much it would cost to rent your own home and include this in their CPI (the rental equivalence approach). Canada and Australia directly reflect the purchase price when a house is bought (the acquisition approach). The United Kingdom and New Zealand measure actual cash outflows such as mortgage interest payments (the user cost approach).

The National Data Office cites three main reasons for not including owner-occupied housing cost in the CPI: it cannot be directly observed and must be estimated; there is no internationally agreed measurement standard; and because the CPI is linked to related laws such as pensions, making changes would have significant social repercussions.

The illusion created by inflation without owner-occupied housing cost: Underestimating inflation

According to the "Consumer Price Trends" announced by the National Data Office on the 3rd, the consumer price index for January was 118.03 (2020=100), up 2.0% compared to a year ago. The rate of increase fell from 2.4% in October and November last year to 2.3% in December, maintaining a declining trend for two consecutive months.

This structural gap became even more apparent during the post-COVID period, when housing prices soared. In reality, the cost of buying or renting a home in Seoul increased dramatically, but the CPI failed to reflect this properly. As a result, a distortion arises, making inflation appear lower than it actually is.

Researcher Jeong points this out: if owner-occupied housing cost is not reflected in inflation, it becomes difficult to recognize the need for tighter monetary policy based solely on the CPI, even if such a policy is necessary to stabilize prices.

This leads to ripple effects. The market relies on the CPI to predict monetary policy. If the CPI is low, the expectation is that “the Bank of Korea will lower interest rates.” Since rising housing prices are not captured in the statistics, this creates the misconception that “inflation is stable, so it’s okay to cut rates.”

Jeong said, “At the end of last year, there were excessive expectations of a base rate cut, and it is believed that this was partly because owner-occupied housing cost was not captured in the CPI.”

The US has long grappled with the same issue

This is not an issue unique to Korea. The United States has also experienced long-standing debates over how to reflect OER (Owner’s Equivalent Rent), or owner-occupied housing cost, in inflation statistics. OER accounts for roughly 40% of the US CPI.

Stephen Miran, a former Federal Reserve (Fed) Governor, criticized OER for “responding to actual rental trends with a 6-12 month lag and being based on survey estimates rather than real transaction data, which undermines its credibility.” The criticism is that an artificial figure that does not reflect market realities controls 40% of the CPI.

There are issues in the opposite direction as well. In countries like the United Kingdom, where mortgage interest is included as a housing cost, a paradox arises: when central banks raise interest rates to curb inflation, the housing cost component rises and actually pushes the CPI higher. Whichever method is chosen, there is no perfect answer.

Starting this year (2026), the European Union (EU) has begun including owner-occupied housing cost in its inflation index (HICP). This decision comes after years of debate. At some point, Korea may also need to officially start this discussion.

This content was produced with the assistance of AI translation services.