With the Bank of Korea raising the base rate for the second meeting in a row to 3% a year, the burden from rates is expected to grow in the housing market as well. Experts said the combination of the interest burden and uncertainty over the government's tax overhaul would deepen a wait-and-see mood among buyers. Still, many said the impact of this hike on pulling down home prices would be limited, as strict lending curbs have already made it hard to raise funds to purchase dwellings. The shift to monthly rent in the lease market and the financing cost burden on builders and developers are expected to grow further.
the Bank of Korea's monetary policy committee on the 27th raised the base rate by 0.25 percentage point, from 2.75% a year to 3% a year. It followed a 0.25 percentage point hike in July, marking increases at two consecutive meetings.
The Bank of Korea said the domestic economy is showing stronger-than-expected growth on the back of robust exports and a recovery in domestic demand, and projected inflation to stay above the target level for a considerable period. It also cited the continued sharp rise in dwelling prices in the greater Seoul area and a sizable increase in household loans as reasons for the rate hike.
Real estate experts said the rate hike could dampen dwelling transactions, but its impact on prices would likely be limited. That is because a shortage of dwelling supply and rising jeonse and monthly rents continue, while lending curbs have already greatly reduced the amounts buyers can borrow.
Kim Hyo-seon, chief real estate expert at KB Kookmin Bank, said, "Recently, the base rate and market rates do not necessarily move in the same direction or by the same magnitude," and added, "While the rate burden can delay the timing of buyers' decisions, structural factors such as supply shortages and higher housing costs will offset a significant part of the impact."
In fact, according to the Bank of Korea, the overall lending rate on a new-loan basis at deposit banks in July was 4.27% a year, down 0.04 percentage point from the previous month. This means that even if the base rate rises, market rates and bank lending rates do not immediately increase by the same magnitude.
Lee Eun-hyung, a research fellow at the Construction Policy Research Institute, also said, "Loan regulations including the stress debt service ratio (DSR) have already strongly suppressed demand for dwellings," and added, "It is hard to expect that this rate hike alone will tame home prices or bring a meaningful level of listings to the market." However, Lee said the interest burden on borrowers with variable-rate loans could increase.
The impact of the rate hike is expected to vary by region. In Seoul's Gangnam area, analysts said whether there will be additional hikes, the direction of tax reforms, and stock market volatility could have a bigger impact on buyer sentiment than the size of this increase.
Nam Hyuk-woo of the Woori Bank Real Estate Research Institute said, "Popular areas in Gyeonggi Province and mid- to low-priced areas in Seoul could keep their price strength for the time being, but Gangnam and Seocho districts could see investment sentiment weaken amid overlapping uncertainties from tax reforms and the stock market," and added, "High-priced dwelling buyers are more likely to delay rather than rush transactions."
In the lease market, there is a rising possibility that jeonse will shift more quickly to monthly rent. When the jeonse loan lending rate rises, the interest tenants must bear increases, narrowing the cost gap with monthly rent.
Nam said, "The shift to monthly rent could speed up due to higher jeonse loan lending rates," and added, "With pure jeonse listings dwindling, volatility in jeonse prices could also grow." Kim, the Commissioner, said, "The burden of housing costs from the shift to monthly rent could concentrate on young people and households without dwellings," and added, "Support that enables the private sector to keep supplying rental dwellings should be maintained."
A burden is also expected on dwelling supply. That is because financing expenses are rising for builders and developers that fund project costs through project finance (PF). Lee, the research fellow, said, "Rising funding rates for PF operators are a clear negative," and added, "It could also adversely affect efforts to expand dwelling supply."