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Real Estate Purchases by Foreigners Soaring

#Key Business Issue l 2020-08-10


Housing prices in Seoul have continued to rise for the last three years since the inauguration of the Moon Jae-in government. According to the Korea Appraisal Board, prices of apartments in Seoul increased 54.7 percent to 26.78 million won per 3.3 square meters as of July this year from 17.31 million won in May 2017.

While home prices in Seoul have soared, foreigners are also jumping into the local real estate market, raising concerns over potential speculative housing transactions by foreign investors in South Korea. Here is Park Won-gap, a senior real estate analyst at KB Kookmin Bank, to examine the role of foreign buyers in the Korean housing market.

From 2017 to May this year, foreigners bought some 23-thousand 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 five-thousand-three-hundred in 2017, six-thousand-nine-hundred in 2018 and seven-thousand-three-hundred in 2019. As of May this year, the figure stood at three-thousand-five-hundred, up 27 percent from the same period of last year. In brief, foreigners are increasingly buying apartments in South Korea.

Traditionally, many Americans, mostly ethnic South Koreans in the U.S., bought real estate in Korea. But in recent years, more and more Chinese have shown interest in the Korean real estate market. Between 2017 and May this year, Chinese nationals made over 13-thousand apartment purchase transactions in Korea. This far outnumbers Americans with four-thousand-two-hundred. Notably, Chinese money keeps flowing into the Korean housing market.

According to the National Tax Service, a 40-something U.S. citizen has bought as many as 42 small apartment units for 5.6 million dollars in total in the metropolitan and Chungcheong regions over the last two years. In another case, a 30-something Chinese person with a student visa purchased eight apartment units in Korea. That person rented out the homes to earn money but did not report rental income to the tax authorities.

Of more than 23,000 homes bought by foreigners from 2017 to May this year, 33 percent were not occupied by them. Also, 1,036 foreigners purchased two or more homes in Korea during the period. Ninety percent of their purchase transactions were concentrated in Seoul and its surrounding metropolitan area. So, why have the foreigners invested their money in real estate in Korea?

I imagine they have acquired apartments in South Korea for residential use or investment. From foreigners’ point of view, the Korean housing market is not considered very attractive in terms of earnings from leasing, as the earnings rate typically remains at around 1.5 percent. I don’t think they purchase Korean apartments because of earnings from rent. Rather, they seem to turn to the so-called “gap investment.” Gap investors buy homes while inheriting the jeonse contract of the tenants still living there. Jeonse refers to a unique Korean rental system, where tenants pay a large deposit instead of a monthly rent. Gap investment is a widely popular method of buying homes in Korea, as it allows buyers to purchase properties with little investment.

Actually, 33 percent of the properties purchased by foreigners are not occupied by owners, while 170 foreigners purchased three or more homes. Foreigners’ home investment pattern in Korea is pretty similar to locals’.

It seems speculative housing transactions by foreigners have contributed to rising real estate prices, especially in Seoul. More seriously, foreigners’ increasing real estate purchases have generated controversy over discrimination against local citizens. For Koreans, it is becoming increasingly difficult to buy apartments, due to repeated loan restrictions. Foreigners, on the other hand, can simply purchase homes in Korea with money brought from their countries as long as they report to the authorities. Moreover, they don’t have to reside in the homes they bought. In other words, some real estate regulations do not apply to foreigners. For these reasons, analysts say that housing transactions by foreigners increased further whenever the Korean government announced new real estate measures.

I don’t think foreign buyers greatly influence the Korean housing market. But many point out that the government’s tight real estate regulations discriminate against Koreans in favor of foreign homeowners. In fact, Koreans are subject to tough regulations on mortgage loans, such as strict loan-to-value and debt-to-income ratios. In contrast, foreigners can borrow money overseas when purchasing homes in Korea. Fewer mortgage restrictions for foreigners have spawned controversy over reverse discrimination against Korean home purchasers.

For these reasons, there are rising calls for devising regulations on home transactions by non-Koreans. The ruling Democratic Party and the government are reportedly examining a relevant bill, so it remains to be seen whether the National Assembly will approve it. Researcher Park now explains some real estate policies for non-residents in other countries.

Some countries control the excessive inflow of foreign capital into local real estate markets through heavy taxation. Canada imposes a 20 percent acquisition tax on foreigners who purchase real estate for residential purposes in Vancouver. If a foreigner buys a one-million-dollar house, for example, he or she has to pay 200-thousand dollars for the acquisition tax. In Australia, foreigners buying real estate worth more than 50 million dollars are required to get the approval of the Foreign Investment Review Board. Singapore also applies a 20-percent acquisition tax on foreign investors who purchase property there. Countries, where a large amount of foreign money flows into, adopt high acquisition taxes on foreigners to curb real estate speculation by foreigners.

Skyrocketing property prices are not unique to Seoul. Major cities all over the world are struggling with the spike in housing and rental prices, and many governments are busy formulating countermeasures. The financial authorities in China started to tighten loan regulations early this month to block the local real estate market from overheating. The U.K. and Sweden have recently restricted housing loans drastically, while Canada has raised taxes on home transactions by foreigners. Home prices in Japan have also risen. Reports say that prices of some apartments in downtown Tokyo had recovered to the level of the early 1990s, when the nation’s housing bubble reached a peak.

The heated property markets around the world have much to do with the COVID-19 pandemic. In an age of the ultra-low interest rate, massive government spending has caused a large amount of liquidity to flow into the real estate markets. In this situation, more foreign speculative forces may disrupt the Korean housing market. If that happens, people looking for houses for residential purposes, not for speculation, will suffer damage.

I agree that it is necessary to protect those who need homes for residential purposes while discouraging speculative investment through stricter regulations. The ruling party has proposed a bill for imposing acquisition taxes of 20 percent on foreigners who do not live in their homes for six months after purchases. The party is also considering levying capital gains and comprehensive real estate taxes on foreigners who do not reside in their apartments after buying them. The opposition party is also expected to present similar measures aimed at stemming property speculation by foreigners and protecting those who purchase homes for residential use.

Buying homes for residential purposes shouldn’t be a problem. But real estate investment for speculative purposes should be strictly regulated, regardless of nationality, to prevent the market from overheating. It is urgent to come up with measures to block speculative foreign funds, which could rattle the local real estate market.

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