Bank of Korea Raises Interest Rates After 3 Years and 6 Months... "Prolonged Tightening Could Lead to Housing Price Declines"

▲ Seoul Apartments

The real estate market is on edge as the Bank of Korea raised the base interest rate today (July 16) for the first time in 3 years and 6 months.

Many anticipate that the rate hike will act as a negative factor for the housing market, especially as it coincides with the imminent announcement of a tax reform plan that includes increases in property-related taxes, such as the comprehensive real estate holding tax.

Kim Gyu-jung, a real estate expert at Korea Investment & Securities, said, "While this rate hike was partially priced into market interest rates, it is coupled with government real estate regulations, which could lead to weakened purchasing power for housing, dampened buying sentiment, and sluggish transactions." She added, "The impact will be greater in mid-to-low-priced areas, where reliance on loans is relatively high, rather than in high-end apartment areas where the proportion of cash buyers is high."

For now, experts do not expect an immediate surge in properties for sale or a drop in prices.

This is because mortgage interest rates at commercial banks have already soared to the 4 percent range, and loan limits in regulated areas such as Seoul are already capped at 200 million to 600 million won.

Yang Ji-young, an expert at Shinhan Premier Pathfinder, predicted, "During the previous rate hikes in 2021 and 2022, the base rate rose from 0.5 percent to the high 3 percent range in a short period, and mortgage rates also skyrocketed, causing a significant shock to the market. However, current base rates and mortgage rates are already high, and commercial bank rates have already reflected these levels, so the possibility of a large number of properties hitting the market in the short term is not high."

Nam Hyuk-woo, a real estate researcher at Woori Bank, forecasted, "It could act as a factor that dampens the buying sentiment of those in the three districts of Gangnam, who have purchasing power and are timing their home purchases." He added, "Combined with the tax reform plan to be announced at the end of this month and recent total loan regulations by banks, it will likely have the effect of delaying demand."

However, there is a strong expectation that if additional rate hikes continue throughout the year and persist into next year, the downward pressure on prices in the sales market will increase.

In particular, there is speculation that the tax reform plan, to be unveiled in late July or early August, could have a greater-than-expected impact on the market.

Park Won-gap, a senior real estate expert at KB Kookmin Bank, diagnosed, "As the Bank of Korea is expected to raise interest rates several times, it could act as a factor for housing price declines by the end of this year or next year."

There are also observations that non-Gangnam areas will be relatively more affected, further deepening market polarization.

Yang Ji-young said, "Mid-to-low-priced areas such as Gangbuk, where the proportion of loans is high and residents are sensitive to increases in financial costs, may face relatively greater pressure for property listings and price drops." She added, "In contrast, key areas with a high proportion of cash, such as the three districts of Gangnam, may see limited impact from rising interest rates, resulting in less significant increases in property listings or price adjustments."

Beyond housing, the market for income-generating real estate, such as commercial buildings, also faces an increased possibility of shrinking transactions due to the rate hike.

There are also many concerns regarding instability in the jeonse (long-term deposit rental) and monthly rent market.

The observation is that as the increased interest and tax burdens from rate hikes and higher holding taxes are passed on to rent, the burden on tenants will grow further.

A real estate agent in Mapo-gu, Seoul, predicted, "Holding taxes are taxes that must be paid every year as long as one owns a home, so landlords have no choice but to pass the increased burden on to rent." He added, "Demand for converting jeonse to monthly rent will increase, and the rise in monthly rents will also accelerate."

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