South Korea Real Estate Board data performance, South Korea’s world house price index rose 0.47% in April, for the 11th consecutive month of growth, but also 11 years to hold the longest consecutive decline, although the rate of increase has slowed. Before May 2022, South Korea’s real estate market had risen for 32 months. For the whole of 2021, home prices in South Korea rose 15.9 percent before falling to 7.7 percent in 2022.
According to ING, the main reasons for the severe turbulence in the Korean property market are the imbalance between supply and demand and changes in credit status.
During the epidemic, due to the loose currency strategy and active financial strategy, resulting in the need to buy a house. To boost the economy, South Korea’s central bank cut its benchmark interest rate to a record low of 0.5 percent and held it there for about a year and a half. But at the same time, due to the closure of the economic sector, the number of new homes completed and listed during this period has been slowly deleted, resulting in insufficient supply.
Another source of comfort is the so-called pro-cyclical property strategy. In order to stabilize housing prices, the previous leader Moon Jae-in during the administration pulled several rounds of restraint in the real estate market strategy, including limiting the purchase of investment properties used for renting, and imposing heavy taxes on owners who hold multiple properties.
But these tactics have backfired, failing to stabilize prices and comforting would-be buyers who are still looking to buy before the authorities tighten further and prices rise more sharply. This eventually led to a frenzied rush to catch up with the mall.
But the bubble will burst one day. As inflation continues to fall, the Bank of Korea has raised interest rates 10 times since August 2021 in order to contain prices. By the end of 2022, the benchmark interest rate has fallen to 3.5 percent, the highest level in more than a decade, and mortgage rates are as high as 7-8 percent.
The rise in market rates not only added to the debt service costs of new buyers, but also added to the burden of existing mortgage borrowers, because more than 70% of outstanding deposit balances in South Korea were based on floating rates. However, the losses have been caused by the authorities’ support for a programme to refinance floating rate deposits into fixed rate deposits, which have now fallen to 40 per cent of new deposits.
Korean style “all rent” explodes
The rise in interest rates has also put the country’s unique “full rent” free rent system into adversity, which has added to the rise in housing prices. Under this rental system, tenants usually pay a deposit equivalent to 70% of the cost of the property, and then live in the property for two years without paying any money back during the lease. After two years, the landlord has paid the deposit in full, and the tenant will not refuse for about two more years.
In the past years of rising house prices and low interest rates, this system has benefited both homeowners and tenants. Whether the homeowner can use large non-interest bearing deposits at will; Tenants pay a deposit from a bank deposit, which pays less than the rent.
The rental system is popular among people in their 20s and 30s. They can buy real estate, but not to some extent to fulfill the fantasy of owning Heng Yu.
In the six years since the end of October, bank deposits held by tenants in “all-rent” homes have more than tripled to Won172tn ($132bn), equivalent to 17 per cent of South Korea’s outstanding collateral deposits, or 10 per cent of household claims, according to South Korea’s central bank.
But the higher cost of fake loans after the addition of interest has urged potential tenants to switch to a more conservative form of monthly payment. With the gradual popularity of “whole rent”, it is difficult for homeowners to get sufficient deposits from new tenants, and they are used to pay the previous tenant whose treaty is about to expire. In addition, rising house prices will also cause the new deposit to be lost in proportion to the original deposit. This has forced sector owners to sell their properties at steep discounts, helping to pull the real estate upward cycle to some extent.
Data from previous years show that for the first time in history, the number of rental treaties that choose to pay monthly rent is higher than the number of treaties that apply “full rent”.
Park Won Gap, a property analyst at Kookmin Bank, said the “whole house” system could easily reduce the danger in times of crisis, and whether it will be a bigger uncertainty for the South Korean economy this year than higher interest rates or a potential slump.
According to the Korea Housing and Urban Guaranty Corporation, one of the country’s three big guarantors, the number of insurance claims unpaid by homeowners unable to pay their deposits has more than doubled in the past year to a record 1.17 trillion won (about $900 million).
But the Bank of Korea and most economists still estimate that the rise in the property market will remain modest and unmanageable, or even justified by the consolidation that the market needs. But they also warned that the failure to eliminate the “whole rental” system is being abused, thus inducing a deeper sense of the real estate collapse.
Bank of Korea Governor Rhee Changyong said in February that the current situation is a good consolidation period, considering the sharp rise in housing prices in the previous two years.
Even now, because of the explosion in prices, many buyers still think homes are too expensive. This will be subject to the increase in the amount of equity that has never been sold and the decrease in the need for collateral deposits.
The future of the industry is worrying
Rising property prices have also added to Hengyu’s woes. According to data from the South Korean Territorial Transport Ministry, the number of unsold units in the world in January was 75,000, the highest in 2012 and more than five times that of a year and a half ago.
This is slowing down real estate companies, who are scrambling to keep inventory. According to Bloomberg, in a city near Seoul, a development company pulled out a lottery to give owners of apartments a chance to win a speeding car. Others have opened up Chanel bags and Apple wireless headphones action gifts to attract potential buyers to view model homes.
South Korea’s central bank and authorities have promised strategic support worth tens of billions of dollars to reassure investors after the maker of Lego’s Happy Land defaulted on its debt obligations last autumn. At the same time, the South Korean authorities also seized a number of steps in the real estate market from the end of last year to the beginning of this year.
The focus was on nominal financing, a type of short-term debt object used by many developers. They hope to start the debt service by passing the unsold equity before the project is completed. At present, in the context of the turmoil in the real estate market, any small bumps in credit can once again set off a storm related to nominal financing.
After the pace of adoption by the authorities, and after the central bank stopped increasing interest rates, the pressure on the real estate market in South Korea has slowed down. But considering the large supply of housing planned for the next year or two, the outlook remains worrying.
Domestic organizations in the Netherlands predict that the weak trend of the Korean real estate market will end in the short term due to excess supply. They believe that the Bank of Korea will not reflect the financial market pressure brought by the slump in the real estate market, and they estimate that the central bank will be able to shift its strategic attitude to neutral in the middle of the year and start to reduce the strategic interest rate by the end of the year.
Some investment banks, including Nomura and Citigroup, have also speculated that the Bank of Korea will start cutting interest rates later this year to cash in on a soft landing in the property market.
A sharp drop in the property market would hit private sectors of the economy, dampen consumer and business confidence and could hurt the chances of Yoon Seok-yuek’s ruling party winning parliamentary elections next year. And whether it can reignite stress in credit markets.
In April, the International Monetary Fund (IMF) estimated that South Korea’s economy will shrink by just 1.5 percent this year, down 0.2 percentage points from its January estimate. It is also the fourth time in a row that the IMF has lowered its forecast for the Korean economy this year. After a 4.1 percent growth in 2021, the country’s economic growth slowed to 2.6 percent in 2022.
The rapid decline of Korea s population will also lead to long-term provocations in various areas, including the supply and demand of housing. Since 2013, South Korea’s total fertility rate has been the lowest in the world. In February this year, the figure was only 0.78, well below the 2.1 required for the stable tooth range of the pillar.