The growth rate of Korea has slowed down recently. While there are many concerns surrounding the Korean economy, this article tries to get insight into major economic issues and relate them: interest rates and house prices
Recent Adjustments Made by the Bank of Korea
On 2023 January 13, The Bank of Korea reported that they decided to raise the interest rates by 0.25%. This is the first seven consecutive increases in history, and the Monetary Policy Board has raised the benchmark interest rate successively since April last year. It seems to have taken into account the rising consumer price index of 5% and the base rate gap with the U.S., which has widened to 1.25 percentage points. In other words, this contractionary fiscal policy is intended to tackle the soaring inflation rate. However, it also collapsed another important economic market at the same time – the real estate market
This Is What’s Happening in the Real Estate Market
According to a result of analyzing the court registration information plaza by real estate information provider Economic ManLab, a total of 166,634 buyers purchased collective buildings for the first time in their lives in the Seoul metropolitan area (Seoul, Gyeonggi, and Incheon) in 2022. This is the smallest number since the statistics began to be compiled in 2010. Compared to 2021 (302,261), it plunged 46.9%. Last year, 38,726 buyers of the first collective building in Seoul were found. Gyeonggi Province had 95,671 people and Incheon had 26,237. In short, fewer people are looking for a new house. Subsequently, this reduced demand for houses has decreased house prices a lot. According to the National Housing Price Trend Survey for December 2022 released by the Korea Real Estate Agency on the 16th, the monthly change in housing prices in Seoul was -1.96%, a decrease from the previous month (-1.34%). This figure exceeded -1.39% in December 2008, the largest drop ever. The fall in Seoul last month was -1.34%, the highest since the financial crisis, but exceeded the level of the financial crisis in a month. This is the greatest drop since the Korea Real Estate Agency compiled related statistics in December 2003.
The Association Between Interest Rates and Housing Prices
The reason behind the falling house prices lies in the increased interest rates. When people buy a new house, they are likely to borrow from banks to pay for the high house price that they cannot afford without borrowing. However, if the interest rates rise, this means the cost of borrowing rises. Therefore, people are discouraged to borrow, and stop looking for a new house. As a result, the demand for houses falls, contributing to the general decrease in the house prices.
Potential Risks
Falling house prices can incur more serious economic inequalities than we may think. First of all, some people see buying a house as an investment. They do this by borrowing a lot of money. However, if house prices fall, they cannot earn any profits from their investment, being unable to pay back their debt. Furthermore, if this problem spreads, many banks will go bankrupt because they can’t receive any interest. This phenomenon is what happened in 2008, known as the Great Recession. On the other hand, the collapse of house prices may allow some low-income people to buy better houses. By doing so, they will be able to improve their standard of living and develop the overall economy. This way, falling house prices have both advantages and disadvantages. Therefore, house prices must be appropriately set.