South Korea Housing Market Turns a Corner

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After years of decline, the South Korean housing market appears to have turned around. That represents a significant shift for the whole country's economy, market watchers say, since home ownership is the key way most Korean households save money, and since mortgages are the main business of most banks.
 
Property prices in Seoul peaked in mid-2008 and drifted south until the middle of last year. But they have risen since then and look set to post decent gains in 2014. Prices fell 0.4 percent last year but are set to rise 3 percent this year, according to Nomura, followed by a 5 percent gain in 2015.
 
Affordability has also improved, with an improving economy leading to gains in household income, and home-buying capability also bolstered by declining interest rates and the slide in price. For ordinary households, it's now more affordable to buy a home in Seoul than at any point in the last 10 years, according to Société Générale's economist Suktae Oh. Affordability gains look set to continue this year, thanks in part to decent economic growth.
 
The central Bank of Korea raised its forecast in April to gross-domestic product growth of 4 percent this year, up from 3.8 percent, an advance on the 3 percent growth last year. Prospects look similar for 2015 as well.
 
Overall, Korea has an ageing population and a record level of debt when compared to incomes, both trends that are bad news for property. But there appears to be pent-up demand that leaves Korea in a position for a cyclical upswing, according to Nomura economist Young Sun Kwon.
 
"We believe the housing inventory adjustment is coming to an end, which should underpin a house price recovery, with positive knock-on effects to the broader economy," Young says.
 
It's unlikely that the central bank will raise interest rates until the end of the year, although Young does expect a hike in December. Since most Koreans have variable-rate mortgages, the stability in rates is another factor driving a stronger housing market.
 
Korea has a unique rental system known as Jeonse, in which tenants pay a lump sum to the landlord on moving in. The landlord is then free to invest that money as he or she chooses, and must simply return the deposit at the end of the rental contract, without any interest. The tenant pays no monthly rent.
 
That system made sense when Korea's economy, as one of the "Asian Tigers," was booming. But with steadier growth there are fewer ways for the landlord to invest that lump sum for outsize short-term gains. The government appears to be preparing to scale down if not prohibit the Jeonse system, moving towards the normal monthly-rent program used in the rest of the world instead. That should increase home-buying demand by encouraging Jeonse tenants to buy homes instead, as well as pumping more cash into the banking system that can then be used for mortgages.
 
The government has also sought to support the housing market by reducing the number of permits allowed for new-home construction. Total permits are due to fall from 470,000 to 374,000 this year. There as increased production in 2011 and 2012, which pushed prices lower. But home builders turned bearish in 2013 and reduced construction, and several ran into financial difficulty. Since it typically takes two to three years to complete a housing project in Korea, supply should be constrained for the next few years, bolstering the price gains.
 
The total number of unsold homes has plunged by two-thirds since its 2009 peak, and now stands at 58,576 - less than the long-term average of 73,000.
 
The housing-market recovery is leading to a wealth effect in Korea. "The recovery of the housing market will support consumption as well as credit growth this year," Oh says. "The possibility of a renewed credit and housing market boom may very well be the key upside risk facing domestic demand in 2014."
 
Hard assets - chiefly property - are the main driver of wealth in Korea. Almost two-thirds of Korean households own their own homes, while only one-quarter own any stocks or mutual funds, half the rate of U.S. investors.
 
For overseas investors, the turnaround in the Korean property market is augmented by a rising currency. The Korean won is likely to benefit from increased international investment into the Korean stock market, since many market trackers expect the country to outperform other Asian nations.