Tension is rising in the construction and real estate sectors amid the possibility of an interest rate hike. An increase in loan rates could escalate the burden of refinancing real estate project financing (PF) and maintenance costs, while also reducing the purchasing power for housing. Concerns are growing that rising financial costs could lead to increased member contributions and delays in construction starts.
According to financial sources on November 11, Morgan Stanley forecasts that the Bank of Korea will raise the base rate from 3.00% to 3.25% this month, with a potential increase to 3.50% in the first quarter of next year. The Bank of Korea estimated during a financial stability briefing in September that a 0.25 percentage point increase in the base rate would raise the annual interest burden for households and businesses by approximately 7 trillion won.
If the loan balance remains unchanged and rates rise by 0.25 percentage points, the annual interest burden for a borrower with a 500 million won loan would increase by 1.25 million won. A tenant with a 300 million won lease loan would face an additional annual cost of 750,000 won, or 62,500 won per month. This increase in interest burden could lower housing purchasing power and create additional pressure on construction companies' sales.
If the base rate rises to 3.25%, the legal cap on the conversion rate from existing lease deposits to monthly rent would increase from 5.00% to 5.25%. However, existing monthly rents would not automatically rise. Shim Hyung-seok, head of the Udaebbang Real Estate Research Institute, stated, “Since monthly rents are linked to interest rates, the conversion rate will also rise, increasing upward pressure.”
The construction and development sectors are concerned about the burden of financing and loan refinancing. According to the Financial Services Commission, the outstanding balance of PF loans in the financial sector was 115.8 trillion won as of the end of June this year. If this balance remains unchanged and loan rates uniformly rise by 0.25 percentage points, the annual interest cost would increase by approximately 289.5 billion won.
The actual burden will vary depending on fixed or variable rates, maturity, and refinancing conditions. However, new loans or projects nearing maturity could be exposed to rising market rates. For a project borrowing 1 trillion won, a 0.25 percentage point increase in borrowing rates would raise annual interest costs by 25 billion won.
Particularly, regional projects or mid-sized and small construction firms with lower credit ratings may face greater burdens. Projects with poor viability may experience worsened refinancing conditions or fail to secure additional funding, leading to delays in construction and potential reevaluation of the project itself. Delays in sales could result in a vicious cycle of increased financial costs due to late loan repayments.
Increased financial costs also impact maintenance project expenses. If the interest rates on loans for associations rise, interest costs will increase, and the longer the project duration, the greater the cumulative burden. This could lead to increased additional contributions from members. Projects that cannot reflect costs in the general sale price due to price regulations and demand conditions may also see their viability deteriorate.
A representative from a mid-sized construction firm explained, “In a challenging construction market, if interest rates rise further, the pressure on financing will inevitably affect existing projects.”
* This article has been translated by AI.
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