The Bank of Korea is on the verge of raising its benchmark interest rate to the 3% range, creating tension across the real estate market. The increase in rates is expected to not only heighten the borrowing burden for buyers but also impact financing for reconstruction and redevelopment projects, project financing (PF) refinancing, rising sale prices, jeonse loan burdens, and the shift to monthly rent.
According to the financial sector, the Bank of Korea's Monetary Policy Committee raised the benchmark interest rate from 2.50% to 2.75% on July 16. If the rate increases again, it will enter the 3% range.
Industry experts believe that the rising interest rate trend could simultaneously pressure both demand and supply in the real estate market. While past rate hikes were primarily seen as factors that dampened buyer interest, this time, the increase in project costs and financing expenses could lead to a reduction in supply.
Kim Jin-wook, chief economist at Citibank Korea, stated in a report, "The Bank of Korea's rate hike will affect household credit loans and demand for overdraft accounts, but its impact on the housing market's upward trend will be limited. Factors such as the structural housing supply shortage in Seoul from 2026 to 2028 will accelerate the upward trend in the metropolitan housing market."
Redevelopment and reconstruction sites are expected to be the first to feel the impact. These projects have significant financial costs, including operational expenses for associations, relocation costs, project loans, bridge loans, and main PF. As interest rates rise, the burden of interest on associations will increase, potentially leading to higher contributions from members. With construction costs already straining project viability, rising financial costs could delay projects or complicate the selection of construction firms.
The PF market will also be directly affected by rising interest rates. Developers and construction companies typically use bridge loans during the land acquisition phase and switch to main PF after obtaining permits. An increase in rates will raise refinancing costs, and financial institutions may adopt a more conservative approach to project viability assessments.
Concerns are growing in the real estate development sector that stricter PF loan conditions due to rising rates will make it difficult to extend bridge loan maturities and transition to main PF, leading to inevitable delays in construction and a decrease in new supply. The Korea Construction Industry Institute has also analyzed that a contraction in PF funding could result in delays in housing starts and weaken the supply base.
The trend toward increased monthly rent is also expected to intensify. As jeonse loan rates rise, tenants may be more inclined to choose monthly rent or half-jeonse rather than increasing their deposits. Landlords may also prefer to switch to monthly rent if the structure of receiving jeonse deposits to reduce loans weakens.
An industry insider noted, "With the recent decrease in jeonse listings in Seoul and the rise in jeonse loan rates, the burden on tenants could increase. With a shortage of jeonse listings and rising loan interest burdens, the options for young people, newlyweds, and first-time homebuyers will inevitably narrow."
* This article has been translated by AI.
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