While the recovering demand in the South Korean housing market drives up prices and brings household debt to record levels, construction activity still stalls, threatening market overheating in the capital region due to a demand-supply imbalance.

This extended overview from the Global Property Guide covers key aspects of the South Korean housing market and takes a closer look at its most recent developments and long-term trends.

Table of Contents:

• Housing Market Snapshot
• Historic Perspective
• Demand Highlights
• Supply Highlights
• Rental Market
• Mortgage Market
• Socio-Economic Context

Housing Market Snapshot

After a significant slump since July 2022 brought by high borrowing costs, tight credit conditions, and previously stringent tax and regulatory measures on property, South Korea's housing market is showing signs of recovery. As of July 2024, the Housing Sales Price Index recorded a slight year-on-year increase of 0.21% (-2.28% when adjusted for inflation), as reported by the Bank of Korea (BOK). Single-family homes saw the largest year-on-year growth of 1.07% (-1.44% inflation-adjusted), followed by apartments, which increased by 0.32% (-2.17% inflation-adjusted). In contrast, row houses experienced a 0.61% drop (-3.08% inflation-adjusted).

South Korea's house price annual change:

Data from the Korea Housing and Urban Guarantee Corporation (HUG) revealed that in July 2024, the average price per square meter for newly built apartments stood at KRW 5.253 million (USD 4,524), reflecting a 21.19% year-on-year increase, driven largely by the capital region. Seoul registered the highest average per square meter price at KRW 13.315 million (USD 9,634), marking a substantial 27.34% year-on-year increase.

Average sale price of new apartments, by submarket:

Seoul's price surge is primarily attributed to rising construction costs - driven by higher raw material prices, increased labor expenses, and elevated interest rates - coupled with a resurgence in demand, including speculative activity and heightened interest in investment properties in the capital. These factors, further compounded by limited housing supply, have intensified affordability concerns and raised the potential for market overheating.

In the first quarter of 2024, the Korean Housing Affordability Index (K-HAI), which measures the proportion of income required for a median-income household to afford a standard mortgage on a median-priced home, reached 62.8 points nationwide. In Seoul, the index stood at 151, more than twice the national average and 50 points higher than the next-highest regional index, highlighting the significant disparity between the capital and other regions.

In response, the South Korean government has indicated its readiness to act. "The government is closely monitoring the rapid price increases in Seoul's housing market," said Deputy Prime Minister and Minister of Economy and Finance Choi Sang-mok, quoted by The Korea Times, during a meeting at the Government Complex Seoul in July 2024. He added: "The government will take swift action if speculative demand or signs of market overheating are detected." According to a statement from the Ministry of Land, Infrastructure and Transport, proposed measures include easing redevelopment restrictions, fast-tracking apartment construction, and offering loan guarantees to developers.

Historic Perspective:

Government Policies Steering Housing Market Fluctuations

In the early 2000s, the South Korean housing market saw rapid price growth, peaking in 2006 with a nominal House Price Index increasing by 11.51% year-on-year (9.22% inflation-adjusted). This period of speculation in urban areas, particularly Seoul, was followed by a slowdown with the 2008 global financial crisis. Although nominal prices continued to grow by 5.91% year-on-year in 2008, inflation-adjusted growth dropped to just 1.70%. The early 2010s saw prolonged stagnation. In 2012, nominal house prices fell by 1.42% annually, with inflation-adjusted prices dropping even further, by 2.81%. Weak demand and macroeconomic uncertainty contributed to these declines, despite low interest rates aimed at stimulating growth.

A turning point came in 2014 with new government policies, including lower interest rates and relaxed mortgage regulations, which boosted housing demand. Nominal house prices rose by 1.80% year-on-year in 2014 and by 3.42% in 2015. These gains coincided with a surge in housing starts, peaking at 716,759 units in 2015. However, in 2016 and 2017, annual nominal price growth slowed to 0.80% and 1.47%, respectively. Stricter regulations, such as loan-to-value (LTV) and debt-to-income (DTI) limits, aimed at curbing speculative buying, helped cool the market.

By 2018, nominal price growth had slowed to 1.00% year-on-year, with inflation-adjusted prices declining slightly (-0.31%). The government's regulatory efforts, coupled with a record number of housing completions in 2018 (626,889 units), led to more balanced market conditions. In 2019, nominal prices recorded a slight annual decline of 0.33%, reflecting softer demand in certain areas.

The market saw a resurgence in 2020 and 2021, fueled by low interest rates and pandemic-driven demand. Nominal prices jumped by 5.43% year-on-year in 2020 and by 9.87% in 2021, the strongest growth since the mid-2000s. However, this trend reversed sharply in 2022, as rising interest rates, were introduced to combat inflation, and stricter mortgage regulations reduced demand. Nominal prices dropped annually by 4.68% in 2022, with inflation-adjusted prices falling by 9.24%.

In 2023, the downturn continued, with nominal house prices decreasing by 3.51% year-on-year and real prices by 6.48%, reflecting the impact of higher interest rates and weaker buyer confidence. While housing completions remained relatively high at 436,055 units, new housing starts fell sharply to 242,188, reflecting the ongoing caution among developers and weaker buyer confidence.

20-year annual house price change (based on end-of-year housing sales price index and consumer price index):

Construction activity dynamic (started and completed housing units):

Data Source: Ministry of Land, Infrastructure and Transport, KOSIS.

Demand Highlights:

Early Signs of Recovery Amidst Increase in Lending and Anticipation of Interest Rates Cuts

In 2024, South Korea's housing market showed early signs of recovery following a significant decline in transactions in recent years. Key factors contributing to this resurgence include anticipated interest rate cuts, relaxed housing regulations, and an increase in mortgage lending. According to the Korean Ministry of Land, Infrastructure, and Transport, over 279,000 residential sales transactions were recorded nationwide from January to June 2024, representing a 17.43% year-on-year increase compared to the same period in 2023.

Data Source: Ministry of Land, Infrastructure and Transport, KOSIS.

Regional performance varied, with Gyeonggi province accounting for the largest share of transactions during the first seven months of 2024 (26%), followed by Seoul at 14%. In terms of growth, Seoul experienced the highest year-on-year increase in residential sales transactions at 46.33%, followed by Gyeonggi (22.53%) and Gangwon (17.44%). Conversely, declines were reported in Jeju (-5.32%) and Sejong (-3.15%).

Number of residential sales transactions, by submarket:

The Korea Housing Research Institute forecasts a further rise in purchasing demand as interest rates decrease and the economy improves. Senior Researcher Kim, cited by The Korea Economic Daily, stated: "Effective demand, which refers to actual purchasing demand, is expected to increase rapidly. Foreign demand is also rising, and if the economy shows signs of recovery, housing demand could surge significantly."

The Korean Statistical Information Service (KOSIS) data from H2 2023 indicates that nearly 91,500 residential properties were owned by foreigners in South Korea, reflecting a 9.51% year-on-year increase. The majority of these homes (55%) were owned by Chinese nationals, followed by the citizens of the US (23%), Taiwan (4%), and Australia (2%). Approximately 73% of foreign-owned properties are concentrated in the Greater Seoul area, which includes Gyeonggi province, Seoul, and Incheon, with 38.4% located in Gyeonggi, 24.8% in Seoul, and 9.8% in Incheon.

Supply Highlights:

Construction Activity Stalls, Raising Concerns of Market Overheating in the Capital Region

Over the recent years, residential construction activity in South Korea has been facing a significant slowdown. Despite the Yoon Suk Yeol administration's ambitious plan - outlined by The Chosun Daily - to build 2.7 million housing units over five years, including 80,000 units in Seoul in 2023, only one-third of the targeted permits have been issued. Data from the Ministry of Land, Infrastructure, and Transport shows that nationwide residential construction permits in 2023 fell by 17.83% year-on-year.

The slump has deepened in 2024, with just 171,677 housing permits granted between January and July, reflecting a 22.85% decrease compared to the same period in 2023. The steepest declines were seen in Daegu (-84.36%), Jeonbuk (-69.42%), and Jeonnam (-68.98%), while Seoul saw an 18.41% drop. Meanwhile, housing starts for the first seven months of 2024 increased by 27.45% year-on-year, indicating a gradual improvement in developer sentiment. However, it is important to note that this rise follows a sharp 58.31% year-on-year decline in 2023. In Seoul, the housing starts growth remained negative, with a slight decrease of 0.54% year-on-year during the January to July 2024 period.

Data Sources: Ministry of Land, Infrastructure and Transport, KOSIS.

Residential construction activity, by submarket:

Rising construction and borrowing costs, combined with increased default risks, have brought public and private housing development to a near halt, further worsening the housing demand-supply imbalance. Although the KOSIS reports a nationwide housing supply rate of 102.1% as of 2022 (where a 100% rate indicates an equal number of housing units and households), Seoul's supply rate has steadily declined over the past three years, falling to 93.7% - the lowest in 13 years.

Data Source: KOSIS.

The Korea Housing Industry Research Institute, as cited by The Korea Economic Daily, projected a cumulative shortage of 878,000 housing units between 2017 and 2024. This shortfall, coupled with increasing demand, is driving up housing prices and fueling concerns of market overheating, especially apparent in the capital region.

Rental Market:

Re-Accelerating Rental Inflation and Growing Preference for Monthly Rents

After a dip in 2023, rental inflation in South Korea re-accelerated in 2024, both in the long-term deposit (jeonse) and monthly rent (wolse) segments. The Integrated Rent Index (combining both segments) published by the Korea Real Estate Board (REB) showed a 1.6% annual growth in August 2024, up from -1.9% in January and -7.6% a year ago. Long-term deposits increased 1.56% year-on-year, while monthly rents increased 1.2%.

For both segments, the trend was primarily driven by apartment rents, which increased by 2.4% year-on-year in August 2024, compared to a marginal 0.2% for row houses and detached houses.

Data Source: REB.

On the regional level, the most pronounced annual increase in rental prices was reported in Gyeonggi (3.6%), followed by Incheon (3.2%), Seoul (3.1%), and Daejeon (2%). At the same time, Busan, Daegu, Sejong, Gyeongbuk, Gyeongnam, and Jeju demonstrated an actual decrease in rents between 0.3% and 2.4% year-on-year.

In absolute terms, the capital city of Seoul and the surrounding province of Gyeonggi remain the most expensive rental markets, with both long-term deposits and monthly rents notably above the respective national averages of KRW 229.5 million (USD 169,723) and KRW 769,000 (USD 569) reported by the REB in August 2024.

Key rental indicators, by submarket:

As of 2019, 42% of South Korean households rented their residence, of which 15.1% were under the long-term deposit (jeonse) system, 19.7% were under monthly rent with a deposit, 3.3% paid monthly rent without deposit, and 3.9% occupied their dwellings free of charge.

Under the traditional South Korean long-term deposit (jeonse) system, instead of making monthly payments, renters make lump-sum deposits (typically, between 50% and 80% of property value), which are then reinvested by landlords to make a profit and are returned to renters at the end of the lease term.

The system has been historically common in the country's rental market, however, in recent years the share of households renting under it declined from 22.4% in 2006 to 15.1% in 2019, according to the results of the housing status survey published by the KOSIS. The system has been criticized for the difficulty of entering the rental market, the significant financial burden put on renters, as well as limited protection it offers, leading to thousands of cases of landlord fraud reported every year.

Jang Joon-hyuk, head of the marketing office at real estate platform Dabang, was quoted by Maeil Business Newspaper commenting on the rental market in Seoul: "With the continued preference for monthly rent, the proportion of monthly rent transactions in studios has reached a 10-year high, while lease transactions have returned to the level of 10 years ago <…> The preference for monthly rent seems to be deepening nationwide."

Mortgage Market:

Government Regulations Aim to Curb Household Debt Expansion

As the South Korean housing market started to recover, more consumers rushed to take out loans for investments, notes The Korean Economic Daily in their recent article, further pointing out that household debt in the country reached record levels in Q2 2024, largely due to the expansion of residential lending.

According to the BOK data, after a slowdown in 2022 (2.9% annual growth compared to 7.9%, on average, in the previous decade), the balance of mortgage loans in the country increased by 5% in 2023 and reached KRW 1,092.7 trillion (USD 0.8 trillion) in Q2 2024, which represents 61.4% of all household loans maintained by the financial system.

"The balance of household credit rose in the April-June period due to a larger increase in mortgage loans, which was led by housing transaction growth in the Seoul metropolitan region," said a BOK official quoted by The Korean Economic Daily.

The largest share of mortgages is maintained by commercial and specialized banks (63.9%), and the rest is split between non-bank depository institutions (9.5%) and other financial institutions (26.6%).

Data Source: BOK.

The BOK has recently expressed concerns about the growth of household debt, and the bank's Governor Rhee Chang-yong, pledged to work toward reducing it without causing a severe economic downturn.

"It is time to adjust property policies, which were eased to prevent the sector's hard landing late last year. <…> We will consider macro policies if the adjustment through micro policies is not enough," he said, adding that low borrowing costs are unlikely in the near term and warning against investments with heavy debt in the domestic property market.

At the end of August, the BOK's monetary policy board kept its base interest rate at 3.50% for a fifth straight meeting. After a series of hikes starting in the second half of 2021, the base rate has been at this peak level since January 2023, and although a cut is widely expected in October, it has not yet been announced by the central bank.

The BOK previously signaled a possible cut in the fall, citing moderation in inflation and growth, however, it has been hesitant to change the rate faster than global peers due to the country's soaring household debts and the fast recovery in the housing market, writes The Korean Economic Daily.

Data Source: BOK.

Along with the central bank's monetary policy, interest rates on mortgage loans issued by South Korean banks have stopped trending up, according to the latest BOK figures. In July 2024, the weighted average interest rate for new loans was reported at 3.50% (down from 4.28% a year ago and 4.16% two years ago), while the weighted average rate for outstanding loans stood at 4.22% (only marginally above 4.21% a year ago, but elevated compared to 3.17% two years ago).

As of July 2024, 96.4% of the newly extended mortgages are fixed-rate loans and only 3.6% are floating-rate loans, the proportion having shifted significantly from the respective 60.1%/39.3% just four years ago.

Weighted average interest rates on bank mortgage loans to households:

Echoing the determination of the BOK Governor to curb the expansion of household debt, the Financial Services Commission (FSC), the South Korean government's top financial regulator, implemented the second phase of the stricter stressed debt-service ratio (DSR) regulations since September 1, 2024, the first phase in effect since February.

The new regulation imposes surplus interest (called stress interest) to reflect potential future interest rate hikes when the borrower executes the loan. Under the new system, borrowers may experience a 2-4% reduction in lending limits based on loan types, explained The Korea Herald.

Additionally, individual banks take measures against the ballooning of the market, some recently announcing the increase in home loan interest rates by 0.05-0.20 percentage points. The country's largest lender KB Kookmin decided not to provide credit loans exceeding customers' annual incomes.

As the banking system is enforcing stricter rules and raising the bar for lending, South Korean loan seekers turn to other financial service providers such as insurers, writes The Korean Economic Daily.

Socio-Economic Context:

Moderate Economic Growth and Inflation Stabilization Projected

Following a post-pandemic rebound of 4.3% in 2021, South Korea's real GDP growth slowed down to 2.6% in 2022 and 1.4% in 2023. The BOK annual report ties the slowdown to weakening recovery momentum for consumption (due to high inflation and high interest rates), as well as slower export growth against the backdrop of weak global manufacturing. However, the beginning of 2024 showed stronger-than-expected positive development, allowing the BOK to project a 2.4% GDP growth for 2024 in their latest economic outlook. This is in line with the International Monetary Fund (IMF) projections that currently put South Korea's economic expansion at 2.3% in 2024 and 2025.

Nationwide inflation, measured by the Consumer Price Index (CPI), has eased from more than a two-decade high of 5.1% in 2022 to 3.6% in 2023 and most recently reached the BOK target of 2% in August 2024, bringing expectations of a policy rate cut in the near future. The IMF forecast expects the annual inflation in South Korea to register at 2.5% in 2024, which matches the latest projection from the BOK. "Inflation is easing but it is expected to take a considerable time to stabilize at around the target level," Governor Rhee of the BOK told reporters after the latest policy meeting.

Data Source: IMF.

The South Korean labor market is traditionally characterized by high rigidity, high duality (meaning the market is fragmented into regular and non-regular workers), and long working hours. Regular workers enjoy better job security, more benefits, and higher wages than non-regular workers, while non-regular workers typically face much higher layoff rates, and receive much lower wages and social benefits coverage in pension, health, and employment insurance. As of August 2023, non-regular workers made up 37% of all waged/salaried employees, according to the results of the KOSIS survey data.

In recent decades, various efforts have been made to tackle these issues. The current government has announced further labor market reforms to improve flexibility and enhance the protection of vulnerable groups. A three-pillar reform plan was introduced, including more flexible working hours, switching to a performance-based pay system, and tackling labor market duality, however, specific measures are yet to be implemented.

Seasonally adjusted unemployment rate in South Korea went down since 2021 and was most recently reported at 2.4% in August 2024. The IMF projects unemployment in the country at 3% for 2024 and 3.1% for 2025.

Data Source: BOK.

Overall, the prospects for the South Korean economy are stable, based on its resilient macroeconomic performance, dynamic export sector, and robust external finances, according to Fitch Ratings, who affirmed the country's 'AA-' standing in March 2024. The potential risks that could delay the recovery of domestic economic development are escalation of geopolitical tensions in the Middle East, downturn in the economies of China or US, and persistence of elevated interest rates despite moderating inflation, said the Korea Development Institute (KDI) in their August 2024 outlook.

Sources:

1. Korean Statistical Information System (KOSIS)
   1. Average selling price per sqm by region: https://kosis.kr/
   2. Employed persons by industry/employment type (10th KSIC): https://kosis.kr/
   3. Housing Occupation Type by Region and Income Level: https://kosis.kr/
   4. Status of Foreign Housing Ownership: https://kosis.kr/
   5. Housing Supply Rate: https://kosis.kr/
2. Bank of Korea (BOK)
   1. House Price Index (HPI): ecos.bok.or.kr/
   2. The Bank of Korea Base Rate: https://www.bok.or.kr/
   3. Inflation Targeting: https://www.bok.or.kr/
   4. Monetary Policy Decision & Opening Remarks to the Press Conference (August 22,2024): https://www.bok.or.kr/
   5. Economic Outlook (August 2024): https://www.bok.or.kr/
   6. Economic Statistics System: https://ecos.bok.or.kr/
   7. Annual Reports: https://www.bok.or.kr/
3. Housing Finance Statistics (Houstat)
   1. Housing Affordability Index (K-HAI): https://houstat.hf.go.kr/
4. Financial Services Commission (FSC)
   1. FSC Announces Plans for Implementing Stressed Debt Service Ratio Rules in H2 2024: https://fsc.go.kr/
5. Ministry of Employment and Labor
   1. Labor Reform: https://www.moel.go.kr/
6. Ministry of Economy and Finance
   1. 2024 Economic Policy Directions: https://english.moef.go.kr/
7. Ministry of Land, Infrastructure and Transport
   1. Housing Statistics for July 24 (KO): https://www.molit.go.kr/
   2. Housing Statistics for December 23 (KO): https://www.molit.go.kr/
   3. 427,000 Households Supplied in Seoul and Metropolitan Area (KO): https://www.molit.go.kr/
8. Korea Real Estate Board (REB)
   1. National Housing Price Trend Survey_Monthly (August 2024): https://www.reb.or.kr/
9. Korea Development Institute
   1. KDI Economic Outlook: https://www.kdi.re.kr/
10. International Monetary Fund (IMF)
    1. Country Overview: Republic of Korea: https://www.imf.org/
    2. Advancing Labor Market Reforms in Korea: https://www.imf.org/
11. Federal Reserve Economic Data (FRED)
    1. Currency Conversions: USD for Korea: https://fred.stlouisfed.org/
12. Fitch Ratings
    1. Fitch Affirms Korea at 'AA-'; Outlook Stable: https://www.fitchratings.com/
13. The Korea Economic Daily
    1. Korea's Household Debt Hits Record High on Mortage Loans: https://www.kedglobal.com/
    2. BOK Chief's Top Mission: Soft Landing For Household Debt: https://www.kedglobal.com/
    3. August Inflation Puts BOK Under Fire for Delayed Pivot: https://www.kedglobal.com/
    4. BOK Chief Signals Rate Cut; Warns of Rising Housing Prices: https://www.kedglobal.com/
    5. Korea's Credit Loans Balloon as Regulators Cap Mortgages: https://www.kedglobal.com/
    6. Korean Banks Raise Mortgage Rates Despite Looming Rate Cut: https://www.kedglobal.com/
    7. S.Korea's Q2 GDP Slows 0.2%, Upholds Rate Cut Expectations: https://www.kedglobal.com/
    8. If Things Continue This Way, Housing Prices Will Skyrocket Again in 2025-2026 (KOR): https://www.hankyung.com/
14. The Korea Herald
    1. New Regulation on Housing Loans Comes Into Force: https://www.koreaherald.com/
15. The Korea Times
    1. Government Urged to Tackle Rising Seoul Home Prices: https://www.koreatimes.co.kr/
16. Maeil Business Newspaper
    1. Amid the Continued Preference for Monthly Rent in The Rental Market… : https://www.mk.co.kr/
17. Dong-A Ilbo
    1. More Than 10,000 People Fall Victim to Jeonse Fraud: https://www.donga.com/
    2. The Monthly Rent of Seoul's Studio Flats Exceeds KRW 1 Million: https://www.donga.com/
    3. Youth Bearing the Brunt of Rental Fraud Impact: https://www.donga.com/