Economies with solid demand for home-backed lending, including South Korea, are likely to see housing prices decrease merely 3 percent in the event of a 1 percentage point hike in the benchmark interest rate, a report showed Tuesday. 

Korea’s ratio of mortgage loans to gross domestic product came to 47.1 percent last year, up 14.7 percentage points from the 2010 estimate, according to a report from the London-based Centre for Economic Policy Research on how monetary policy affects a country’s housing prices.

In countries where the housing finance market is highly developed or the proportion of mortgage loans to GDP is high, housing prices can be expected to fall sharply when short-term interest rates or deposit rates increase -- factors that are greatly affected by a government key rate hike, the report said.

Since 2000, data showed, Asia’s fourth-largest economy has faced four periods of decline in housing prices: April 2004 to January 2005, November 2008 to April 2009, February 2012 to March 2013, and December 2018 to August 2019. All occurred soon after key interest rate hikes. 

“Our findings showed a 1 percentage point rise in short-term interest rates may drag down a nation’s housing prices in two years, but the drop will be only 0.7 percent on average. Adjusting the base rate to stabilize rising housing prices isn’t really that effective,” an official from the Centre for Economic Policy Research said. 

Founded in 1983, the nonprofit organization is a network of researchers who conduct economic policy research aimed at enhancing the quality of policymaking within Europe and beyond. 

Meanwhile, Bank of Korea Gov. Lee Ju-yeol recently hinted at a potential rate hike in the second half of this year.

“If our economy is expected to stage a modest recovery, (the BOK) will normalize the current easing of monetary policy in an orderly way at an appropriate time,” Lee said in a statement marking the central bank’s 71st anniversary. 

The move is partly aimed at cooling down an overheated housing market fueled by ample liquidity due to COVID-19 stimulus measures, including ultralow interest rates. 

By Choi Jae-hee (cjh@heraldcorp.com)