Korea Must Avoid a Real-Estate Market Collapse

Korea Must Avoid a Real-Estate Market Collapse

Bank of Korea Governor Rhee Chang-yong on Wednesday warned that inflated real estate and stock prices “will not be able to escape adjustments” after the bank hiked the key interest rate by an unprecedented half percentage point. U.S. Federal Reserve Chairman Jerome Powell also warned people to “reset” plans to buy new homes.

It is rare for the BOK governor to comment publicly on asset prices, but these are unusual times. A steep interest rate hike poses a serious threat to people who borrowed money after household debt in Korea soared to W1.8 quadrillion, around 80 percent of which was borrowed on fluctuating interest rates (US$1=W1,312). If the base interest rate rises from 2.25 percent to three percent by the end of this year, the additional interest burden will therefore amount to W10 trillion.

A steep increase in interest rates is a formidable threat to the real estate market, where prices have skyrocketed in recent years. The chances of a sharp decline in prices are growing as home sales continue to plummet. Transactions in Seoul plunged 30 percent on-year in the first half to just around 7,700 apartments sold, while the number of apartments up for sale surged 53 percent to more than 60,000. According to the Korea Real Estate Board, apartment prices in Seoul have been falling for six straight weeks.

Countries where real estate prices had similarly gone through the roof are seeing steep drops in prices. New Zealand, Canada and Sweden are witnessing double-digit drops in real estate prices following interest rate hikes. In 1998, right after the Asian financial crisis, Korean apartment prices dropped 18 percent over the course of the year. Koreans in their 20s and 30s, who borrowed heavily to buy starter homes are likely to be hit especially hard.

Highly leveraged households will have to switch to lower-interest loans to minimize the burden, while middle-income households will need to tighten their purse strings. And the government needs to come up with measures to help vulnerable groups readjust their loans and ensure a soft landing for the real estate market.

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