South Korea's house price growth accelerates
Lalaine C. Delmendo | January 31, 2021
Figures from the Bank of Korea, the country's central bank, are more modest, with house prices rising by 4.78% y-o-y in November 2020 (4.15% inflation-adjusted). But this is the best performance in almost nine years.
Foreigners have been buying more properties in South Korea in recent years, though the country has a reputation of not being easy to navigate. The housing market is unusual, with huge key money deposits (the Chonsei system), and significant government intervention.
Yet judging by results this is a well-run market. It has been stable since the 2007 crisis.
Early this year, in a typical intervention, the authorities decided to put a brake on the market once again. According to a directive released by the Financial Service Commission (FSC), beginning March 2, 2020, the current loan-to-value (LTV) ratio of 60% will be lowered to 50% when buying homes valued up to KRW 900 million (US$823,340) in the newly designated “speculative areas”. For properties valued above KRW900 million, a 30% LTV ratio will be applied. Moreover, homeowners with one house in speculative areas are eligible to apply for mortgage loans to buy another home but with an agreement that they will sell the current property within two years. The new rule also compels them to move into the newly purchased home. These new rules followed other anti-speculative measures introduced in the past years to curb house prices in so-called “overheated speculative zones”, including Seoul, Gwacheon and Sejong City.
The results of all this caution have been good: unsold houses on the market have gone down from 2009's peak figure of 123,297 housing units, to 47,797 units in 2019. The banking system is in good health, with the delinquency rate of loans to households falling to a mere 0.3% in 2019, from 0.5% in 2009 and 1.8% in 2003.
Seoul's house price index was up strongly by 10.1% y-o-y (9.45% inflation-adjusted) in November 2020, according to Kookmin Bank. Aside from Seoul, all of the country's seven largest metropolitan cities saw continued house price rises.
- Daejeonregistered the biggest y-o-y price increase of 12.18% y-o-y in November 2020 (11.51% inflation-adjusted), sharply up from last year's 3.7% growth and its best showing since January 2012.
- In Daegu, house prices soared 7.12% (6.48% inflation-adjusted), a sharp improvement from the previous year's 1.4% increase and its biggest y-o-y rise in more than four years.
- In Incheon, house prices rose 6.15% (5.52% inflation-adjusted), sharply up from the previous year's 0.3% y-o-y increase and its highest growth in more than a decade.
- In Busan, house prices rose by 5.02% (4.39% inflation-adjusted), in contrast to a 1.3% y-o-y decline in November 2019. It was its best showing in almost five years.
- In Ulsan, prices rose by 5.01% (4.39% inflation-adjusted), a sharp turnaround from last year's 4.6% y-o-y fall.
- In Gwangju, house prices rose by a modest 2.6% (1.99% inflation-adjusted), a slight improvement from a 1.7% growth last year.
By property type, apartments recorded the biggest y-o-y increase in prices in November 2020, at 6.72% (6.08% inflation-adjusted), based on figures from the BOK. Detached houses and row houses saw more modest price rises of 2.54% and 1.1%, respectively.
Foreign demand is rising strongly, despite the pandemic. In the first five months of 2020, foreigners bought about 3,500 units, up 27% from a year earlier, according to Park Won-gap of KB Kookmin Bank.
“From 2017 to May this year, foreigners bought some 23,000 apartment units in South Korea. The amount is valued at 7.6 trillion won, which is about 6.4 billion US dollars. The number of home purchases by foreigners has continued to increase year after year to reach 5,300 in 2017, 6,900 in 2018 and 7,300 in 2019,” said Park Won-gap. “As of May this year, the figure stood at 3,500, up 27 percent from the same period of last year. In brief, foreigners are increasingly buying apartments in South Korea.”
Upon conclusion, a property sale contract must be recorded by the foreigner to the head of the Shi/Kun/Ku (city/county/ward). If the property is located in military installation protection areas, designated cultural properties, and ecosystem conservation areas, foreigners shall obtain permission from the head of Shi/Kun/Ku before the conclusion of the contract.
Seoul, South Korea - a lack of sales data
We tend to experience difficulties in assessing the buying prices for apartments and villas in Seoul, due to the paucity of offers for sale in English language, and this year has been no exception. Our research suggests that both upper-end apartments in central Seoul and villas rent for around US$29 per month per square metre (sq. m.).
Because of the difficulty of finding buying prices, we have no gross rental yields figures for Seoul.
South Korean taxes are from moderate to high
Rental Income: Rental income tax is from 6% to 42% for limited liability companies and 10% to 22% for stock companies. Value Added Tax on gross rent is 10%.
If the rental income is less than KRW24 million (US$21,622) and the property value is assumed to be under KRW900 million (US$810,811), 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$18,649) 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 42%.
Buying costs are high in South Korea
Total roundtrip transaction costs can range from 21.45% to 22.90%. The realtor’s fee is regulated at 0.20% to 0.90%, but actual payments are typically higher. The 10% Value Added Tax (VAT) is imposed on all properties. Buyers must also purchase National Housing Bonds worth 5% of the property value; typically sold immediately at 10% to 15% discount. All costs are paid by the buyer.
South Korean landlords benefit from key money
The rental system in South Korea is pro-landlord.
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.
Korea’s economy remains more or less stable; Moon revives the “Sunshine Policy”South Korea’s trade-reliant economy returned to modest growth in Q3 2020, as exports started to recover following the gradual easing of coronavirus-related travel and health safety restrictions worldwide. GDP grew by 1.9% in Q3 from the previous quarter, after contracting by 3.2% in Q2 and 1.3% in Q1, according to the Bank of Korea (BOK). It was the fastest quarterly expansion since Q1 2010. Compared with a year ago, however, the economy shrank 1.3% in Q3 2020, following an annual decline of 2.7% in Q2.
As a result, the BOK recently revised upwards its 2020 economic forecast to a contraction of 1.1%, a slight improvement from its earlier projection of a 1.3% fall. The economy grew by more than 3% annually from 2009 to 2019.
In November 2020, overall inflation stood at 0.6% y-o-y, well below the BOK’s 2% annual target. The BOK expects headline inflation to average 0.5% this year before accelerating to 1% in 2021.
Unemployment jumped to 4.2% in October 2020, an increase from 3.5% in the same month last year, according to the Korean Statistical Information Service (KOSIS). Korea’s unemployment rate averaged 3.6% from 2009 to 2019, based on IMF figures.
Korea’s consolidated fiscal deficit climbed to KRW 70.9 trillion (US$64.85 billion) in August 2020, more than triple the KRW 22.3 trillion (US$20.4 billion) shortfall recorded a year earlier, according to the Ministry of Economy and Finance.
The deficit is projected to increase to about 4.4% of GDP this year, according to Fitch Solutions, up from shortfalls of 2.6% in 2019, 0.6% in 2018 and 1% in 2017.
The national debt is expected to increase further to KRW 846.9 trillion (US$774.6 billion) this year – about 44% of the country’s GDP – following the passage of a fourth fiscal stimulus in September.
After being sworn into office in May 2017, South Korean President Moon Jae-in revived the “Sunshine Policy” to improve South Korea’s relationship with North Korea. President Moon’s efforts led to three inter-Korean summits in 2018, two in Panmunjom (held in April 2018 and in May 2018) and one in Pyongyang (September 2018). The improved relationship is evidenced events that involved both countries:
- The reopening of the Seoul-Pyongyang hotline;
- North Korea sent a delegation to the 2018 Winter Olympics, headed by Kim Jong-un’s sister, Kim Yo-jong;
- South Korean K-pop stars performed a concert in Pyongyang;
- Both countries pledged to remove nuclear weapons from the Korean Peninsula;
- North and South Korea combined teams in some events during the 2018 Asian Games;
- Military leaders from both countries signed an "Agreement on Reconciliation, Non-Aggression, Exchanges and Cooperation" (or "the Basic Agreement"), which aids in easing military tension between both countries.
However in September 2020, a maritime incident that resulted in the killing of a South Korean fisheries official by North Korean soldiers sparked outrage in the South barely a day after President Moon called for a formal end to the Korean War and the need for the two countries to sign a peace treaty.
“This act by the North Korean military amounts to pouring cold water over our consistent patience and efforts for inter-Korean reconciliation and peace and runs directly counter to the yearning of our people,” said a South Korean Unification Ministry official.
The recent incident threatens to weaken the already eroding public support for Moon’s policy for reconciliation.