The Impact of Interest Rate Hikes on Housing Prices Fades Within Two Years

Why do Seoul apartment prices keep rising for 85 consecutive weeks even though interest rates have been hiked twice?

According to an analysis by the Korea Research Institute for Human Settlements (KRIHS):

After a 0.25%p interest rate hike shock, nationwide apartment prices drop by 1.2% within 6 months, but

the decline narrows to 0.9% after 24 months, and statistical significance disappears.

Most news articles last week only featured the 1.2% figure in their headlines. After reading the full 7-page report, I found that the truly interesting part was the latter section.

Housing prices react in completely different ways when interest rates are raised versus when they are cut.

How much did housing prices fall after a 0.25%p rate hike?

If we isolate the period of rising interest rates, the cumulative response of nationwide apartment prices to a 0.25%p hike shock was -1.2% after 6 months, -1.1% after 12 months, and -0.9% after 24 months. Rather than the decline deepening over time, it gradually reverses.

We must also look at the analytical method to correctly interpret these numbers.

Researchers used an LST-VAR model incorporating five variables: the growth rate of the coincident composite index, the consumer price inflation rate, the CD (91-day) rate, the M2 growth rate, and the KB apartment price index fluctuation rate. It is a non-linear model designed for transitions between phases to be gradual rather than abrupt. The estimation period spans 247 months, from January 2006 to July 2026.

Phases were categorized based on the direction of the base rate’s previous move.

Analyzing 328 months from May 1999 to August this year, there were 7 periods of rising rates and 7 of falling rates, lasting 144 and 184 months respectively. Financial News reports introduced the same classification.

Cumulative response of nationwide apartment prices to interest rate hike/cut shocks (Unit: %, figures in parentheses are 90% confidence intervals)

Why does the effect of rate hikes fade after 2 years?

The core of the phrase “it fades within two years” isn’t just that the numbers get smaller, but that the confidence interval crosses zero.

At the 24-month mark, the range is between -2.2% and +0.5%. Since this means a price increase cannot be ruled out, the researchers advised interpreting mid-to-long-term effects with caution. For the 6-month and 12-month marks, the upper bounds were -0.4% and -0.1% respectively, clearly indicating a downward trend.

I interpreted these results as follows:

During periods of rising rates, potential buyers immediately factor interest burdens into their calculations. This causes the shock to be reflected upfront, after which other forces—like income, supply, and expectations for future rates—drive prices. The report also stipulated that this estimate reflects the response to a single 0.25%p hike under the assumption of “ceteris paribus” (all other things being equal). It further noted that actual housing prices are influenced by a mix of economic conditions, housing supply and demand, liquidity, policy, and market expectations.

Interestingly, the estimation for the entire period without distinguishing between phases shows the opposite pattern: -0.5%, -0.9%, and -1.2%, with the decline deepening over time, reaching -1.5% after 36 months. However, the significant range was only from 6 to 20 months after the shock. If you mix the phases and calculate an average, it looks like “a slow, prolonged squeeze,” but if you isolate the periods when rates are actually rising, it is closer to “a quick squeeze that soon relaxes.”

There is one more catch.

This seventh interest rate hike phase, shown in the table as July–August 2026, is only 2 months long. The numbers above represent the average pattern left by the previous six rising periods, and this cycle is barely reflected in the estimates yet.

Why did housing prices keep growing during rate cuts?

The picture flips during periods of rate cuts. A 0.25%p rate cut shock resulted in apartment prices rising by 0.6% after 6 months, 1.2% after 12 months, and 1.7% after 24 months, with all three points being statistically significant. The magnitude of the rise consistently increases.

When you place the two phases side-by-side, the asymmetry is stark.

Interest rate hikes apply pressure on housing prices that peaks at 6 months and then subsides, while the upward push of interest rate cuts accumulates over two years. It’s like a flash when rates rise, but like a savings account that builds up when they are cut.

Differences in duration are also hard to ignore.

Since 1999, periods of falling rates lasted 184 months, which is 40 months longer than the 144 months of rising rates. During the downward phases, M2 growth averaged 12.8% between October 2008 and June 2010, and 10.1% between July 2019 and July 2021. While the table shows that the effect of rate cuts accumulated during periods when money was abundant, the report did not independently prove causality between the two.

Funds supporting Seoul housing prices: Shifts from loans to stocks and gifts

Evidence that this rate hike may not suppress housing prices as much as in the past can be found in the table on page 6 of the report. It compiles “fund procurement plans” for purchasing Seoul homes, showing that the share of jeonse (charter rent) deposits has shrunk to a quarter of what it was five years ago.

Changes in the composition of funds for purchasing Seoul homes (Based on fund procurement plans, Unit: %)

Category	Real Estate Sale Proceeds	Financial Institution Loans	Rental Deposits	Stock/Bond Sale Proceeds	Gifts/Inheritance
2021–2022	27.9	15.7	27.1	2.8	3.7
2023–2025	33.5	22.6	16.1	3.4	3.7
Jan–Apr 2026	32.9	23.6	6.6	6.6	6.4
Change (%p)	+5.0	+7.9	-20.5	+3.8	+2.7

The space vacated by gap investments (using jeonse deposits) has been filled by loans, asset sales, and parental money.

Stock/bond sale proceeds jumped from 2.8% to 6.6%, and gifts/inheritance nearly doubled from 3.7% to 6.4%. The figures for January–April 2026 are sourced from Financial News reports citing data submitted by the Ministry of Land, Infrastructure and Transport to the National Assembly.

Interest rate hikes primarily affect housing prices through loan interest.

Since money from selling stocks or receiving gifts carries no interest burden, the calculation doesn’t change much even if the base rate rises.

This is why the researchers suggest looking beyond just financial institution loans and examining other inflow channels such as policy financing, business loans, jeonse deposits, and family loans.

How does the current housing price trend differ from the 2021 rate hike period?

The previous rate hike period began in August 2021, and Seoul apartment transaction prices fell by 20.0% within 15 months of the start of the hikes. It was a 38-month-long rising phase where the base rate was raised by a whopping 3.00%p.

This time, even the starting line is different.

Although market rates have been rising since the second half of 2025, Seoul apartment transaction prices were 14.5% higher in July 2026 than in the same month of the previous year. According to the Korea Real Estate Board, Seoul apartment prices rose 0.13% in the third week of September, marking 85 consecutive weeks of growth. This matches the record for the longest streak set between 2020 and 2022.

Looking under the hood, the structure is also different.

While Gangnam-gu (-0.42%) and Seocho-gu (-0.37%) are falling, the market is being pulled up by outer districts in the north, such as Seodaemun, Dongdaemun, Seongbuk, and Nowon. The most frequently cited cause is supply shortages, with planned housing completions in Seoul this year expected to be about 26.9% lower than last year. Unlike five years ago, when low-interest liquidity lifted the entire country, the market interpretation is that current demand for actual residency is concentrated in Seoul’s outskirts.

What are the next moves for rate hikes and housing price variables?

The Bank of Korea raised the base rate to 3.00% with consecutive hikes in July and August.

The August consumer inflation rate was 3.1%, exceeding the 2% target, and the growth forecast for this year is 3.3%.

Regarding additional hikes, the BOK maintains that it is difficult to conclude there will be an October hike and that they will continue to monitor inflation and financial market indicators.

According to KRIHS calculations, the effect of the July hike should be most visible around January of next year.

After that point, it is highly likely that where the money is coming from will explain Seoul housing prices better than interest rates themselves. Therefore, the researchers proposed regularly creating a “rate-liquidity phase indicator” to view the direction of interest rates and liquidity simultaneously, and suggested that the Bank of Korea, financial authorities, and the Ministry of Land, Infrastructure and Transport share information.