© YONHAP News

It’s been six months since the current government announced its strongest set of real estate measures on September 13 last year. The stringent regulations, characterized by tougher lending rules and reduced tax benefits, have had the intended effect of cooling the housing market. But the measures may have been too effective, with the rapid contraction in home transactions nearly freezing the housing market. Here is Park Won-gap, a senior real estate analyst at KB Kookmin Bank, to give his analysis of the current state of the real estate market. 

The housing sales survey index measures suppliers’ or builders’ sentiment about business conditions for the sales of new apartment offerings on a monthly basis. A reading above 100 means that optimists outnumber pessimists. The nationwide index fell to as low as 63 this month, although region specific indices remain more optimistic. For example, Seoul stood at 79.6, Daejeon had a 77, Daegu was at 75, and Gyeonggi Province came in with a 73. Optimism about the real estate market in provincial areas continues to fall and ranges between 40 and 60 in some regions according to the index.

Historically, demand for new housing rises in spring. But that doesn’t appear to be the case this year. The nationwide housing sales survey index in March fell to 63, the lowest level since the index began to be calculated in September 2017.

The low index number suggests that housing suppliers have low expectations for new supply in the aftermath of a series of tough government regulations. 

Home transactions have declined sharply as well. There were some 19,000 apartment transactions in Seoul last September, but just 6,040 such deals in January this year. Nationwide, the figure fell to some 50-thousand from some 70-thousand during the same period. In fact, it is increasingly difficult to purchase homes due to the strengthening of loan restrictions. Amid falling housing prices, buyers are waiting for prices to dip further. These factors help explain the noticeable decline in housing trading in recent months. 

The chill in the real estate market is also affecting jeonse(전세) prices. Jeonse is a property lease system unique to South Korea where, in lieu of monthly rent payments, tenants give the property owner a large deposit from which the owners can accrue interest from. The tenant will get the deposit money back at the end of a lease term, which typically lasts for two years. 

Home owners can’t expect future profits from jeonse, as it is a long-term deposit rental, not home buying or selling, and jeonse contracts tend to directly reflect demand and supply of homes. In the jeonse market, supply has outrun demand recently. Some 1.2 million new apartments have been offered across the country for the past three years. The market is flooded with new homes, keeping jeonse prices from rising. Demand for moving also remains low, as home transactions have decreased. With jeonse prices remaining almost the same, compared to two years ago, many tenants prefer to extend their lease contract. As a result, demand for jeonse has turned more tepid and jeonse prices continue to fall. 

The housing trading market and the jeonse market seem to be showing a similar pattern—something different from previous market trends. 

According to the Korea Appraisal Board, jeonse prices for apartments in Seoul have fallen for the 19^th consecutive week. At present, few jeonse tenants have a financial incentive to move because an oversupply of new apartments has contributed to constant or even cheaper jeonse prices.

In light of these developments, the government believes that stability has been restored to the real estate market.

It is widely assumed that the housing market has entered a period of stability. But given low interest rates and the liquidity of the affluent, it is hard to say that the property market has fully stabilized. The market is likely to remain bearish until the first half of this year, and overall housing transactions are expected to remain stagnant throughout 2019. Fewer transactions indicate a contraction in demand.  Of course, the situation varies, depending on the region, but many are tired of notoriously inflated home prices in Korea. Before the present period, apartment prices – especially in Seoul – had been skyrocketing for years. Some areas in the capital have seen housing prices more than double in just five years. Thus, market adjustment seems inevitable. 

Home prices in Seoul surged rapidly last year, climbing by as much as tens of millions of won in a single day. But the frenzy is showing signs of easing six months after strong anti-speculation measures were introduced in September last year. 

Average sale prices of apartments in Seoul have fallen for 17 straight weeks, and so-called “gap investment” has decreased. Gap investment refers to purchasing an apartment currently under a jeonse contract directly from the home owner, while the tenant is still living there. 

Yet, many analysts remain circumspect, saying that it is too early to conclude that shrinking home transactions will lead to market stability. As a matter of fact, not many people feel that housing prices have dropped. After the September measures, prices of some apartments fell by hundreds of millions of won and were subsequently transacted upon, but these were in a select few high-speculation areas.

Moreover, more and more potential home buyers are taking a wait-and-see attitude to the government’s cool-down measures. As fewer people are buying apartments and jeonse prices drop, property owners are struggling to find tenants. Mr. Park explains this reverse-jeonse problem. 

For some time, it was difficult for tenants to secure jeonse homes due to rising prices. But now, it is the other way around. Homeowners find it increasingly difficult to secure tenants, while tenants sometimes fail to get their deposits back even when the jeose term expires because the landlords can’t find new tenants. This typical scene, observed in the early period of excess supply of homes, has been seen in some areas of Seoul and the surrounding Gyeonggi Province. I guess the jeonse trouble will worsen further this year. 

As apartment prices fall, property values could also decline, even to a point below what is owed to creditors. These properties are described by the market as “tin-can housing”, and we may see this problem arise in some regions.

Home owners who have to return jeonse deposits to tenants when the lease contract ends are concerned about the reverse-jeonse phenomenon, as it is difficult to find new tenants. This is true even if they lower prices, due to a drastic fall in housing transactions and an oversupply of new apartments. 

If jeonse prices are significantly lower than two years ago, and if the homeowner can’t find a new tenant, they may be unwilling to return the lease deposit that is legally owed to the old tenant.

Mr. Park says the government needs to fine-tune the details of its real estate policy to properly handle unexpected side effects. 

For now, it is necessary to monitor the impact of housing policies on the market. If the government concludes that the market has fully stabilized, it may consider easing some regulations in order to facilitate transactions, like slightly adjusting acquisition and capital gain taxes. Of course, the government must examine every possible scenario and come up with appropriate measures so as not to send the wrong signal to the market. It has to devise additional, well-thought-out measures aimed at the smooth and stable operation of the housing market.

The September 13 measures have been highly effective, at least so far, in curbing soaring real estate prices. Moreover, it seems the policy was enacted before a housing bubble burst.

But there are also concerns over downside effects such as a dwindling number of home transactions. The government should formulate a more flexible policy that reflects market trends in a better and more accurate way.