The Korea residential market – searching for a happy ending

February 27, 2015 / By  

Considering the high level of household assets in Korea tied up in real estate it’s no surprise that the government has been pulling out all the stops to revitalise the sluggish residential market; cutting interest rates, easing loan-to-value and debt-to-income ratios, lowering purchase and sales taxes and reducing mortgage rates for first-home buyers.

However, all this tinkering has done little to revitalise the market, particularly in Seoul where apartment prices remain 8% below their 2010 peak. The reality is that the market is facing some serious fundamental challenges:

1.  Sluggish economic growth

By global standards Korea’s economic growth is reasonable but most Koreans aren’t benefiting in the chaebol-driven economy. According to the Korea Development Institute, the largest 30 conglomerates account for 82% of GDP but employ just 16% of the workforce meaning the livelihoods of the majority of workers are tied to the struggling SME sector.

2.  High household debt

Household debt has climbed to 164% of disposable income – higher than the US pre-Global Financial Crisis. Interest rate cuts in the second half of 2014 added fuel to the fire causing household debt to grow at the fastest pace in a decade.

3.  Demographics

Koreans are getting older, marrying later and having less children. As a result, the population is forecast to start declining sometime between 2020 and 2030.

4.  Oversupply

Nationwide there are an estimated 50,000 new, unsold units including 30,000 homes in the Seoul metropolitan area alone. Outstanding permits for a further 800,000 new units may keep domestic builders in business but will do little to aid the housing recovery.

5.  The jeonsae rent system

Stagnant house price growth and low interest rates should be the death knell for the jeonsae[1] (lump sum) rent system but the presence of wolsae (monthly rent leases) remains minimal, accounting for only 4% of households nationwide versus 42% of houses on either a jeonsae or hybrid (blend of jeonsae and wolsae) rent system.

Indebted landlords are relying upon jeonsae deposits to keep their heads above water. The Bank of Korea estimates that 10% of Korea’s 3.7 million jeonsae landlords may find it difficult to repay tenants’ deposits. That’s likely a conservative number considering the dominant market practice of having to find a new tenant in order to pay back the jeonsae amount to a departing tenant.

Apartment purchase price indices


 Source: KB Bank, JLL Research

 The Outlook

While there is not likely to be a significant turnaround in the foreseeable future for the residential market, over the longer term several sectors of the market are well positioned for a happy (or at least a happier) ending:

  1. Small units catering to small households – an additional 2.1 million 1-person and 2-person households are forecast by 2020;
  2. A belated but much needed pullback in government-driven greenfield projects is expected to shift developers’ focus to urban redevelopment
  3. The inevitable move towards more wolsae rent structures will create opportunities for en-bloc rental housing and ultimately, the emergence of an institutional investor residential market.

[1] Jeonsae is a traditional Korean method of renting property. Tenants with jeonsae leases pay to the landlord a large upfront cash deposit for the right to occupy the property for a defined period of time, usually two years. At the end of the lease term the deposit is fully refunded to the tenant. No monthly rental payments are due for the term of the lease. As of January 2015, the national average deposit amount was 70.2% of the capital value of an apartment.

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