Rate hikes fail to cool Korea's housing expectations, mortgage demand
Summary
Two consecutive Bank of Korea rate hikes have not eased expectations that Korea home prices will keep rising, with the housing price outlook index at 125 in September, up from 120 in June. Seoul’s sentiment was even stronger at 133, despite mortgage rates nearing 8 percent. Analysts said earlier lending curbs and weak housing supply alternatives have made the market less responsive to higher rates.
Key Facts
- The Bank of Korea raised its benchmark rate in July and August by a quarter percentage point each, bringing it to 3 percent.
- The housing price outlook index in the central bank’s September consumer survey rose to 125 from 120 in June.
- The index in Seoul reached 133, indicating stronger expectations for home prices in the capital.
- BOK Gov. Shin Hyun-song said last month the back-to-back hikes were intended to send a strong signal to the market and moderate price gains in the Seoul metropolitan area.
- Lee Eun-hyung of the Korea Research Institute for Construction Policy said stress debt-service-ratio requirements and lending restrictions had already tightened demand, making another rate increase alone unlikely to control housing prices.
A panoramic view of apartment complexes in Seoul seen from Mount Nam, Sunday / Yonhap
Two consecutive interest rate hikes by the Bank of Korea (BOK) have done little to cool expectations that home prices will keep rising, defying the usual pattern where higher borrowing costs weigh on the housing market, industry officials said Monday.
The central bank raised its benchmark rate in July and August, each by a quarter percentage point, taking it to 3 percent. Yet its September consumer survey showed the housing price outlook index at 125, up from 120 in June, before the rate hikes began. A reading above 100 means more consumers expect home prices to rise than to fall. In Seoul, the sentiment was even higher at 133.
The resilience is striking given that mortgage rates have climbed to nearly 8 percent. It also runs counter to the pattern seen over the past decade, where housing price expectations generally rose as interest rates fell and weakened when rates climbed.
The latest rate increases were themselves aimed in part at cooling the housing market. BOK Gov. Shin Hyun-song said last month that the back-to-back hikes were “an unusual move intended to send a strong signal to the market” and help moderate price gains in the Seoul metropolitan area.
But analysts note that much of the adjustment to tighter borrowing conditions may have already happened.
“The market has already gone through significant demand-side tightening through measures such as stress debt-service-ratio requirements and lending restrictions since last year. It is therefore difficult to expect another rate increase by itself to bring housing prices under control,” said Lee Eun-hyung, a research fellow at the Korea Research Institute for Construction Policy.
Higher rates, meanwhile, have not necessarily translated into more homes coming onto the market.
“Interest rate changes do put pressure on borrowers with variable-rate loans, but it is difficult to expect them to result in a meaningful increase in homes put up for sale,” Lee said. “For people who own a single home and live in it, selling is not an easy decision, especially when there is no abundance of rental properties available as an alternative.”
Taken together, those constraints make the housing market slower to respond to higher rates. More rental and newly built homes would give buyers and renters alternatives, but supply takes time to respond. That could leave housing price expectations elevated for longer than the usual rate cycle would suggest.
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