Credit: Public domain.
Bank of Korea 한국은행, South Korea’s central bank, raised the benchmark interest rate to 1.5% on April 14, up from the 1.25% mark set just three months ago in January.
As recently as August 2021, the benchmark interest rate was 0.5%, as the central bank was releasing liquidity to stimulate the economy during the pandemic slowdown. The Bank of Korea said the rate hike was necessary to combat inflation caused by excess liquidity as well as the war between Ukraine and Russia that affected the price of commodities such as grain and petroleum.
The benchmark rate hike means home mortgage interest rates will rise also. In mid-2019, the average mortgage interest was 2.6%; after the rate hike, the interest rate will be over 4%. To a significant extent, the massive increase in housing cost in South Korea - especially in Seoul - was fueled by cheap money, often borrowed in a variable interest loan.
Outside of Seoul where the demand is weaker, the housing bubble is showing signs of a collapse. In Daegu 대구, for example, new condominium developments are failing to sell out while the housing prices continue to fall. If the trend extends nationwide, a Japan-style housing bubble disaster may become a possibility.