During the year to end-April 2014, the housing purchase price index rose by 1.41%, its fifth consecutive month of annual house price rises, according to the Korean Statistical Information Service (KOSIS). However when adjusted for inflation, house prices were still down by 0.26% over the same period.
On a quarterly basis, nationwide house prices were up by a meagre 0.5% (-0.05% inflation-adjusted) in April 2014.
However, the national house price figures conceal regional house price movements. Among South Korea’s bigger cities, Daegu, the fourth biggest city, saw the largest house price increase of 15.56% during the year to Q1 2014. It was followed by Gwangju (7.1%), Chungbuk (5.91%), Ulsan (5.6%), Incheon (5%), Gyeonggi (4.61%), Gangwon (4.14%), and by Seoul, the country’s capital, where the transaction-based house price indices rose by 3.89% y-o-y in Q1 2014. Busan's house prices rose 3.29%, and Daejeon's 3.26%.
Demand is up. Property transactions rose to 58,846 units in January 2014, well above the average of 43,085 units over the past five years, according to the Ministry of Land, Transport and Maritime Affairs (MLTM).
President Park Geun-hye is determined to ease property market regulations, in an effort to boost the economy as a whole.
“I will drastically boost the property market and loosen up unnecessary regulations so that the economy can be revitalized,” the president said recently, “Many measures adopted to prevent property market overheating turned out to be obstacles after the market went down. These need to be loosened up a bit,” she added.
South Korea has strict loan-to-value regulations, high taxes on housing transactions and on capital gains, and tight subsidized financing.
The South Korean economy is expected to expand by 4% this year, the fastest pace since 2010, mainly due to increased private consumption, construction and export revenues, according to the Bank of Korea (BOK), the country’s central bank.
The key interest rate was kept unchanged by the BOK at 2.5% at its April meeting.
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$22,642) and the property value is assumed to be under KRW900 million (US$849,057), 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$19,528) 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.
In the first quarter of 2014, real GDP was up 3.9% from a year earlier, the highest growth in three years, according to the Bank of Korea. This was mainly attributed to the increase of private consumption, construction and export revenues, despite won’s 8% appreciation over the past year.
The exchange rate is now USD1=KRW1,016.98. Despite won’s record appreciation in the past several months, a recent report released by the International Monetary Fund (IMF) suggests that the won is still undervalued by about 8%, and the country has an abnormally big current account surplus.
South Korea's current account surplus rose to a five-month high of US$7.35 billion in March 2014, up from the previous month's revised US$4.5 billion, according to the Bank of Korea.
The South Korean economy is expected to expand by 4% this year, the fastest pace since 2010, according to the Bank of Korea.
“The economy is doing well broadly, across exports, consumption and jobs,” said Lee Chul Hee of Tongyang Securities Inc. In addition, "Advanced economies are expected to recover quickly, leading to better exports, which will also influence domestic spending," said Im No-jung of IM Investment & Securities.
In April 2014, Bank of Korea kept its key interest rate unchanged at 2.5% for 13 consecutive months, in an effort to continue to boost the economy. The country’s central bank is closely watching for any impact from the ferry sinking on consumption and the economy.
In May 2014, inflation increased to 1.7%, the highest rate in 19 months. However, it remains well below the central bank’s target band of 2.5% to 3.5%. Inflation is expected to be 1.8% in 2014, up from 1.3% in 2013, 2.2% in 2012, 4.0% in 2011 and 2.9% in 2010, according to the IMF.
The country’s unemployment rate stood at 3.7% in May 2014, up from just 2.9% at end-2013, based on figures from Statistics Korea.