Soaring interest rates, house prices are shaking… Concerns about falling into ‘House Poor’

A view of an apartment complex in Seoul.© News1

Mr. A, who bought a house last year with a ‘young-chul’ (loan by attracting souls) by collecting mortgage loans and credit loans, is sleeping through the night due to the interest burden. At the beginning of the year, the loan interest rate rose once, increasing the monthly principal and interest by hundreds of thousands of won. To make matters worse, house prices, which were expected to continue to rise, are turning downward, increasing anxiety.

According to the financial industry on the 31st, as the Bank of Korea’s additional base rate hike increases the debt burden and downward pressure on house prices increases, there are more and more posts expressing concerns at the bank counseling counters and online communities.

On the 26th, the Monetary Policy Committee of the Bank of Korea raised the base rate by 0.25 percentage points from the previous month. It is the first time since August 2007 that the BOK raised the key interest rate for two consecutive months. In particular, as the base interest rate has been raised five times in nine months, the pain of borrowers is exacerbating. The base interest rate, which was 0.5% in August of last year, rose by 1.25 percentage points to 1.75% this month.

Assuming that the loan interest rate rises by the extent of this base rate hike (0.25%p), households’ annual interest burden will increase by about 3.3 trillion won. It is about 160,000 won per borrower. Considering that the base interest rate has been raised five times since August of last year, the amount of household interest burden that has grown over the past nine months is over 16 trillion won. The average increase in interest burden per borrower is about 800,000 won.

It is highly likely that the actual borrower’s interest burden will be higher than this. This is because the bank loan interest rate is set by adding the additional interest rate reflecting the bank margin to the reference interest rate such as the base rate. The main loan interest rates of the four major commercial banks, KB Kookmin, Shinhan, Hana, and Woori, are on the verge of entering the 6% per annum for variable types and 7% per year for fixed types.

Last year, Mr. A, who borrowed 400 million won at an annual interest rate of 2.9% (30-year maturity, equal principal and interest), had an initial monthly interest burden of 950,000 won (11.4 million won per year). The principal and principal amount was about 16.6 million won. However, the interest rate on the loan rose to 4.6% this month, raising the monthly interest rate to over 1.5 million won (18 million won per year). The total principal and interest burden increased to 20.5 million won.

As the Bank of Korea is foretelling an additional rate hike within the year, the suffering of multiple debtors and borrowers is expected to increase. Financial circles predicted that the Bank of Korea could raise the base rate up to three times within the year. Accordingly, the fixed-type main loan interest rate is expected to exceed the mid-7% per annum. Some predict that it will be close to 8% per year.

To make matters worse, house prices, which had maintained a solid upward trend for a long time, also fell this year, raising the anxiety of borrowers.

According to a survey by the Korea Real Estate Agency, apartment prices across the country last week fell by 0.01% from the previous week, continuing the downward trend. The metropolitan area fell 0.02% following the previous week, and Seoul continued to remain flat for three weeks in a row. This is attributable to the weakening of buying sentiment due to concerns over additional interest rate hikes and uncertainties in the domestic and overseas economy. The Seoul apartment sales and demand index fell 0.2p from a week ago to 90.6, the third consecutive week of decline. This means that there are more people selling houses than people buying them.

In particular, it is expected that young people in their 20s and 30s who have borrowed debt in a low interest rate environment will be hit hard by this interest rate hike. According to the BOK survey, household loans in their 20s and 30s stood at 475.8 trillion won as of the end of last year, up 35.2 trillion won from a year ago. Among them, the share of vulnerable borrowers was 6.6%, higher than the average of other age groups (5.8%). Borrowers in their 30s have a loan-to-income ratio (LTI) of 280%. This is the highest level among all age groups. Signs of bad debt are already appearing. The delinquency rate on high-interest loans for vulnerable borrowers in their 20s increased by 31.0% (7.4% → 9.7%) last year. Those in their 30s increased by 27.7% (8.3% → 10.6%).

An official from the financial sector said, “Borrowers have been holding out with the expectation that house prices will rise even if interest rates rise.

(Seoul = News 1)

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