The biggest reason for the growing impact of interest rates on the global real estate market, including Korea’s, was low interest rates. As interest rates have remained low for a long time, many people have expanded their loans and purchased real estate. Since the investment amount per unit is large, real estate is mostly purchased with a loan. The most important criterion when borrowing money is the loan interest rate. In Korea, the base interest rate has been maintained below 2% since 2015. As loan interest rates decrease, loan amounts increase and demand for real estate naturally increases.
Expectations of low interest rates were quickly thrown into disarray, and
after the coronavirus pandemic, the base interest rate fell again significantly. This is because concerns about economic contraction have increased due to the unprecedented infectious disease outbreak. The Bank of Korea lowered its base interest rate to 0.5%. It was at an all-time low. The rate of reduction was also fast. When interest rates fell, people took out debt and entered the housing market. As mortgage loans soared and demand for housing increased, housing prices soared. Interest rates were lowered to stimulate the economy, but money went into real estate. From 2015 to 2021, when low interest rates were maintained, the increase in household mortgage loans was 452 trillion won.
Mortgage loans increased due to interest rate cuts, and housing prices rose as demand for housing increased due to expanded lending. Interest rates, which had been cut, began to rise in the second half of 2021 as concerns about inflation grew. The base interest rate, which exceeded 1%, was raised to over 3% within a year. Likewise, it was unprecedentedly fast.
The first thing that happened when interest rates increased was a decrease in lending. In 2022, household mortgage loans increased by only 28 trillion won. From 2015 to 2021, when low interest rates were maintained, the average annual increase in housing mortgage loans reached 61 trillion won. As interest rates increased, home mortgage loans decreased by more than 30 trillion won per year. As lending decreased, demand for housing decreased. This is why apartment transaction volume has decreased significantly starting from 2022. Housing prices also fell. This is a natural change that occurs as demand decreases.
Even though interest rates remain high, an interesting phenomenon occurred in the first half of 2023. People started taking out loans again and buying houses. Why do people buy houses despite high interest rates? There are many reasons. What stands out among them is anticipation. Even with high interest rates, people began to buy houses with the expectation that interest rates would fall again.
The asset market moves based on expectations. Even though interest rates were high, people took out loans to buy houses, expecting that they would go down again. This is why the proportion of variable interest rates in home mortgage loans has increased from the second quarter of 2023. Even though interest rates were high, I bought a house with a variable rate loan, expecting that interest rates would fall again. However, contrary to expectations, interest rates are not falling but rather rising. In particular, market interest rates are rising rapidly. The variable interest rate on home mortgage loans is exceeding the 7% range. Expectations will turn into confusion. How will the real estate market change if high interest rates continue?
If housing demand has continued to increase due to low interest rates, there is a high possibility that housing demand will decrease during high interest rates. The first sign of declining housing demand is a decrease in transaction volume. In particular, the decline in transaction volume may accelerate, especially in areas that require a lot of loans. According to data from Seoul Real Estate Information Plaza, apartment transaction volume in September was 3,340, a 13% decrease from August. Since the data is as of October 26th, there are 5 days left in the reporting period, but there are observations that a 10% decline is inevitable. Looking at areas with a larger decrease in transaction volume than Seoul’s average, Gangnam-gu ( -28 %) and Seocho-gu ( -28 %) belong to it. This shows that because unit prices are relatively high, more loans are needed, and as interest rates rise, demand may decline more quickly.
Real estate prices are inevitable to fall for the time being.
If demand decreases, real estate prices may fall. What is important is the extent of the decline. Even if housing demand decreases, the price decline may not be significant in the short term. In reality, the final price decider in the real estate market is the seller. Even if there are no buyers, the extent of price decline may be limited if people who own homes do not lower their prices. This is why selling volume is important in a situation where demand is decreasing.
As of October 26, 2023, the number of apartments for sale in Seoul카지노사이트 was 76,000 and in Gyeonggi-do 139,000. Compared to a year ago, Seoul increased by 37% and Gyeonggi-do increased by 21%. An increase in the number of apartments for sale means that there are more houses available for purchase on the market. In other words, it means an increase in supply. Supply is increasing while demand is decreasing. So what will happen to housing prices?
It is expected that Korean real estate market conditions will increase while demand decreases through the first half of 2024, including the remainder of 2023. When demand decreases, transactions will first decrease. As transactions decrease, people who own homes for investment purposes will increase their listings while simultaneously lowering their asking prices. It is expected that real estate prices will likely fall as demand decreases and supply increases simultaneously.
Not everything you expect comes true. People act as if all their expectations will come true, but in reality, that is absolutely not the case. That is why you should not buy your own home or invest in real estate with high expectations. You have to make predictions. Expectations and projections are different. Anticipation includes hope and confidence, but anticipation is thinking that has abandoned hope and excludes personal beliefs. When analyzing the asset market, you must abandon your personal wishes and make probabilistic judgments and predictions.
As the real estate market becomes an investment, the impact on the financial market, especially interest rates, is increasing. But unfortunately, as we are experiencing now, interest rates are not an area that can be predicted. You should never have expectations because you cannot predict. Interest rates will go down! If someone is still expecting this, it means that the Korean real estate market still needs time to discuss price increases.
