Interest in the real estate market often centers on home prices. News typically focuses on how much Seoul apartment prices have risen, which areas have recorded new highs, and whether supply is lacking or excessive. However, a longer view of the real estate market reveals that a more critical variable than home prices is interest rates. While home prices can fluctuate, interest rates determine the entire structure of a society's asset market, consumption, investment, and debt.
Recently, the U.S. Federal Reserve held interest rates steady but indicated the possibility of future increases. The Bank of Korea is also facing pressure to raise rates, considering inflation and household debt issues. Some market analysts predict one or two rate hikes within the year. The atmosphere has shifted from expectations of rate cuts to concerns about tightening.
For the past decade, South Korea has grown accustomed to low interest rates. Whether buying a home, investing in stocks, or expanding a business, low rates have been taken for granted. With manageable debt burdens, asset prices have risen, and leveraging debt for investment has been seen as a natural choice. The rapid increase in real estate prices has also been a consequence of this low-rate environment.
However, when interest rates begin to rise, the situation changes. Even if home prices remain stable, the burden of interest payments increases. The issue is not owning a 1 billion won apartment but rather the rising costs of the borrowed funds used to purchase it. In fact, crises in asset markets often begin with deteriorating cash flow rather than price declines. The moment the real estate market wobbles is when the burden of principal and interest payments reaches an unsustainable level.
This is not just a household issue. Businesses face similar challenges. Models that could endure during low-rate periods reveal their limitations in high-rate environments. Companies with low profitability struggle to cope with rising borrowing costs and face pressure to restructure. Problems in real estate project financing have also emerged as a result of rising capital costs. While the market often discusses real estate trends, the underlying issue is frequently about financial costs.
The government is not exempt from these challenges. With national debt on the rise, increasing interest rates amplify fiscal burdens. Even if the scale of debt remains the same, interest costs grow. Ultimately, this means greater costs for future generations. High interest rates simultaneously impact households, businesses, and the government.
A more significant concern is that South Korea carries one of the highest levels of household debt in the world. In economies with low debt, interest rate hikes may only slow growth. However, in highly indebted economies, declines in consumption, reduced investment, and adjustments in asset markets can occur simultaneously. It is not the strength of the economy but the weight of debt that hinders growth.
Therefore, what is needed now is not endless debate over home price forecasts. The priority is to build an economy capable of withstanding rising interest rates. Households should reduce reliance on excessive leverage for consumption and investment, while businesses must create growth structures based on productivity and technological competitiveness rather than borrowing. The government also needs to focus on fiscal soundness rather than short-term economic stimulus.
Many people wonder whether home prices will rise or fall in the future. However, the real question is whether we can bear the burden of rising interest rates. Home prices are determined by the market, but interest rates are dictated by reality. Ultimately, what burdens people the most is not the price of assets but the cash that flows out each month.
In the end, interest rates are more daunting than home prices.
* This article has been translated by AI.
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