South Korean house prices bounced back in 2011, after a slow second half of 2010. Housing starts and transaction volumes were strongly up. House prices rose by 6.86% (2.60% in real terms) during 2011, according to the Korean Statistical Information Service (KOSIS). The Seoul house price index was up by 0.29% (-3.72% in real terms) during 2011, less than the national house price index.
Housing construction permits increased by 42.2% in 2011, to 549,594 permits, according to the Ministry of Land, Transport and Maritime Affairs (MLTM). Apartment building sales were up 41.8% to 285,000 units.
In 2011 South Korea’s economic growth rate slowed to 3.6%, after 6.16% in 2010. This year, the Bank of Korea (BOK) forecasts 3.7% GDP growth, with inflation easing from its present 4.16% .
The peak of South Korea’s house price boom was reached in 2006, when Seoul prices rose almost 20%. Then the government applied the brakes, imposing controls on housing loans, and hiking capital gains taxes on “speculative areas”. These cooling measures caused a slight slowdown in 2007, with 5.4% price rises in Seoul (1.75% in real terms) and 3.1% nationally (0.6% in real terms). In 2008, house prices rose 5% in Seoul (0.86% in real terms) and 3.1% nationally (-1.5% in real terms).
From April to October 2009 there were house price declines, triggered by the Lehman shock and government curbs. Property transactions fell 35.8% y-o-y to September 2010, in the midst of a cycle of overbuilding. The mini-slump caused the construction industry severe problems.
The government began reviving the housing market in 2009 by purchasing KRW 2 trillion (US$ 1.79 billion) worth of unsold newly built housing, and KRW 3 trillion (US$ 2.68 billion) of land from construction firms wishing to repay their debts.
This was followed by a more intensive expansion measures in August 2010, as the government partially eased real estate lending restrictions through the following measures:
In early-2011, the government implemented more measures to help the decimated construction industry, including tax incentives for real estate investment trusts that buy unsold housing,. It also halved home purchase taxes to 1% to 2%, from between 2% to 4%. The government also announced the establishment of a “bad bank” – the Project Financing Stabilization Bank (PFSB) – to take on as much as KRW 1.2 trillion (US$ 1.1 billion) of non-performing loans, beginning June 2011.
In December 2011, the government revealed another new set of policy measures including:
These measures have been effective. Mortgage loans expanded 8.27% y-o-y during the first three quarters of 2011. Household debt rose by 12.7% y-o-y the year to March 2011, and now averages KRW 50 million (US$ 44,743) per household.
Borrowers have also been attracted by the Bank of Korea’s low key rate, unchanged at 3.25% from June 2011 to January 2012, and by a concerted campaign to push bank house loan rates below 5%.
The government programs have rebuilt confidence in South Korea’s builders, as is evident in the rising shares prices of some homebuilding companies.
There are less unsold houses on the market – down to 69,807 in 2011, strikingly down on 2009’s peak figure of 123,297 unsold houses. And this has been achieved with a banking system in better health, with the average bank loan-to-deposit ratio at 114x today, well down from a range of 120 to almost 140 between 2007 to 2009.
The average interest rate on housing loans has been about 5% since September 2011, a significant decline from the peak of 7.42% reached in November 2008. The Korea market has historically been very sensitive to interest rate changes, as traditionally around 80% to 95% of housing loans have been floating rate.
In order to reduce default risks, the Korean government has promoted fixed rate loans in the second half 2011. By November 2011 floating rate loans account for 69.1% of South Korean home loans, much lower than the 89.4% average in 2010.
So, paradoxically, although key interest rates are a little higher than during the slump – the key rate rose five times from July 2010 to 2011 - actual lending rates are very low.
South Korea’s economy - the world’s 7th biggest exporter - grew by 6.16% in 2010. But in 2011 exports were affected by the won’s appreciation to a peak of US$1=KRW 1,058.9 in July 201).
Economic growth slowed to 3.6% in 2011, with exports up only 12.5%. To slow the won’s rise the government increased foreign reserves, and by December 2011 the won was back down to US$1=KRW 1,148.30.
With 4.16% inflation as of December, the Bank of Korea’s key rate hike to 3.25% of June 2011 is likely to be maintained to prevent further currency depreciation, which could heighten inflationary pressures.
In Korea’s unique chonsei (or jeongsei) rental system, the tenant a lump-sum amount of deposit to the owner for the use of the property, with no additional requirement for periodic rent payments. The deposit is fully refunded at the end of contract period with no interest.
The Chonsei system eliminates the likelihood of tenant’s default on monthly rent as the deposit is maximized until the end of the contract period. 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.
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