Among South Koreaís bigger cities, Daegu, the fourth biggest city, had the highest price increase of 8.69% during the year to November 2015. It was followed by Gwangju (5.92%), Incheon (3.37%), Busan (3.36%), and Ulsan (3.26%). Daejeon had the weakest y-o-y growth of 0.4% during the same period.
Out of the country's 9 provinces, Jeju saw the sharpest price hike of around 6.91% y-o-y in November 2015. It was followed by Gyeonggi (4.41%), Gyeongbuk (2.85%), Gangwon (2.12%), Gyeongnam (1.72%), Chungbuk (1.52%), and Chungnam (1.01%). The provinces of Jeonnam (0.7%) and Jeonbuk (0.4%) had the weakest house price increases.
The house price rises reflect increased demand, with home transactions rising 21% to 290,937 during the year to Q3 2015, according to the Korea Development Institute (KDI), following a 39.1% y-o-y transaction increase during the second quarter.
Korea's GDP rose by 2.6% y-o-y in Q3 2015, following earlier GDP expansions of 2.2% in Q2 and 2.5% in Q1, based on the figures of the Bank of Korea (BOK).† The third quarter's growth was the fastest in five years.† The government predicts 3.1% economic growth in 2016.
Interest rates are also very low. From January to November 2015, rates for housing loans were at an average of 3.02%, significantly lower than the 7.58% peak recorded in October 2008. As of November 2015, the average interest rate on housing loans was 3.04%, according to the Bank of Korea (BOK).
The house price increases were therefore due to a combination of low interest rates and economic growth, along with price rises for chonsei (or jeongsei) houses, leading potential renters to buy their own houses rather than renting. Chonsei (or jeongsei) is a rental system, usually a two-year lease contract, which requires a tenant to pay a lump sum deposit to the property owner instead of a monthly rent. The homeowner will then fully refund the principal amount when the lease agreement is terminated.
The Chonsei system eliminates the likelihood of tenantís default on monthly rents. However, the lump-sum deposit, equivalent to 70% to 80% of the property value, imposes a huge burden for younger renters and new households.
According to Population and Housing Census Report 2000, 54% of households are in owner occupied houses while 28% are under chonsei contracts. The remaining 18% are under a monthly rental system called wolse.
Analysis of South Korea Residential Property Market »
Because of the difficulty of finding buying prices, we have no gross rental yields figures for Seoul.
If the rental income is less than KRW24 million (US$20,690) and the property value is assumed to be under KRW900 million (US$775,862), a special method for the calculation of the personal taxable income is used. In the sample calculation provided, effective income tax amounts to 2.48% of the gross rent, given that the annual rental income is KRW20.7 million (US$17,845) and under certain assumptions.
Capital Gains: Capital gains taxes are around 6% to 38%. A special deduction applies if the property is held for more than three years.
Inheritance: The inheritance tax is between 10% and 50% depending on the property value.
Residents: Residents are taxed on their worldwide income at progressive rates, from 6% to 38%.
Key Money: With any of the standard rental schemes, the landlord receives a huge amount of money up front, protecting him from erring tenants. In the 'wolse 2' system (the most common for expats), the entire rent is paid upfront, with no refund for early termination.
Tenant Security: Tenants are expected to move out of the property as soon as the lease term expires and the key money returned.
However exports continue to pull down the economy with a 0.2% q-o-q decline, reflecting weak demand from its global trading partners, particularly China.†† South Korea's economy is heavily reliant on exports. The country is the world's 7th biggest exporter, and exports account for half its GDP. Which is why the sluggish performance of exports in 2015 has been a major drag on the economy.† In November exports saw their 11th consecutive y-o-y drop of around -4.7%, according to Korea Customs Services and FocusEconomics),. Aside from weak global demand, lower oil prices, and the Chinese Yuan's successive devaluations have affected export performance.
Despite this, low interest rates and government spending have allowed the economy to recover. A government stimulus package worth more than 15 trillion won (US$ 13.5 billion) was launched in July 2015, which countered the detrimental effects to the economy of the MERS outbreak.
After meagre annual growth of 0.3% in 2009, the South Korean economy turned around in 2010 with GDP growth of 6.5%. However, growth then slowed, with 3.7% GDP growth in 2011, 2.3% in 2012, 2.9% in 2013, and 3.3% in 2014.
As part of the government's measures to cushion the weak exports' impact on the economy, the BOK has lowered its key interest rate for the second time by 50 basis points to 1.5% in June 2015. The first rate cut in 2015 was in March, lowering the base rate to 1.75% from 2%.
In December 2015, inflation rose by 1.3% y-o-y, the highest rate in 16 months. Inflation of 1.8% is expected in 2016, according to the IMF.
The countryís unemployment was 3.2% in December 2015, slightly down from 3.4% at end of 2014, according to the Korean Statistical Information Service (KOSIS).
On August 20 2015, tensions between North and South Korea rose after North Korea fired a shell on South Korea's borders, causing the latter to respond by launching artillery rounds. A few days later, both parties reached an agreement.
However, tensions rose once more in January 2016 when North Korea claimed to have tested a hydrogen bomb estimated to be "50 to 100 times the power of the bombs on Hiroshima and Nagasaki," according to nuclear scientist Imad Khadduri. Before North Korea announced the claim, South Korea's meteorological agency detected a 5.1 magnitude earthquake near a recognized test site.
On January 13, 2016, South Korea warned North Korea of 'bone-numbing' sanctions that the United States and its allies might impose.