Perfect property storm in Korea as rates rise and prices fall

Apartments viewed from Mt. Namsan in central Seoul on Friday. [YONHAP]

Rising interest rates are squeezing property owners — especially those who borrowed big last year driven by the fear of missing out. Monthly payments are rising as property values fall.

For these people, many of them young, it's the worst of both worlds.

In line with the rise in U.S. rates, the Bank of Korea increased the base rate from a record-low 0.5 percent last year to the current 3.25 percent. The vast majority of property loans in Korea are floating rate, so as the base rate rises, so do the repayments.

A 33-year-old bought a 1.27 billion won apartment unit in Mokdong, western Seoul, two years ago, borrowing 400 million won.

Payments were 1.1 million a month until late last year. They are now more than 2 million won. The buyer put the property up for sale for 1.4 billion won, but there are no takers.

The average mortgage rate at commercial banks was 2.67 percent in the first quarter, according to the Bank of Korea. The rate rose to 4.43 percent in the third quarter and now ranges between 5 and 7 percent.

Rising rates dampened the market sentiment. A total of 545 apartments were traded in Seoul in October, down from 2,195 in the year-earlier period.

Prices are falling accordingly. Apartment prices in Seoul were down for 26 consecutive weeks as of the third week of November.

The price of the 76-square-meter Jamsil Jugong 5th apartment complex unit in Songpa District, southern Seoul was traded at 1.99 billion won last month, compared to 2.87 billion won at the peak last November.

The price of the same-sized Eunma apartment in Gangnam District, southern Seoul, was sold at 1.77 billion won earlier this month, compared to 2.64 billion won in November.

“The rise of the loan rate lowered demand for the jeonse market, which has led to the piling of jeonse supply, driving down housing prices,” said a spokesperson for Korea Real Estate Board.

The government has started lowering taxes and easing regulations on loans to help the property market to recover, but the measure have not had an effect.

The government needs to do something, like delay interest repayments, for people suffering from rapid interest rate increases, said Lim Chae-woo, a spokesperson for KB Kookmin Bank.

“The Bank of Korea couldn't not raise the rate because of the cost that needs to be paid later if inflation is not lowered from above 5 percent,” said bank Gov. Rhee Chang-yong at a press conference following the Monetary Policy Board held in central Seoul Thursday. “The policy is intended to reduce the pain despite the prediction of difficulties that may be imposed."

BY CHOI HYUN-JU, JIN MIN-JI [jin.minji@joongang.co.kr]