Yook Jeong Soo last month renewed a two-year lease on his three-bedroom home on the outskirts of Seoul, preferring to pay the 30 percent rent increase his landlord demanded rather than buy in the city’s housing market.
“The rent rise was huge, I know, but why should I bother buying a house now with borrowed money when I’m not so confident the price will go up?” said the 49-year-old office worker. “The heyday is over for the housing market.”
Home prices in Seoul and surrounding areas have stalled after a 66 percent climb in the decade to February 2008 raised household debt to record levels and triggered government measures to cool the market. While that’s helped South Korea, Asia’s fourth-biggest economy, avoid the three-year surge in prices in places like Hong Kong and China that’s raised concerns that bubbles were forming, it’s also soured many Koreans on home buying.
The Korean government’s decision on May 10 to ease mortgage lending limits for three of the capital’s most affluent areas won’t prevent further declines, said Kim Hyeon Wook, an economist at SK Research Institute.
“Throwing money into homes is now considered a bad bet and this sentiment is just too strong to be curbed by the government’s deregulation,” said Kim. “People don’t expect prices to go higher.”
Home prices dropped 0.7 percent this year, gained 0.3 percent in 2011, and contracted 1.2 percent in 2010, according to an index compiled by Kookmin Bank, the nation’s biggest lender.
Residential property transactions in greater Seoul fell 38 percent in the January-April period from a year earlier, according to data from the Ministry of Land, Transport and Maritime Affairs. Seoul’s metropolitan area, with a population of about 24 million, is home to 48 percent of the nation’s households, according to the Statistics Korea website.
Home prices in Hong Kong have soared more than 80 percent since the beginning of 2009, while in China they rose 32 percent before the government started imposing curbs in 2010.
South Koreans are avoiding real estate even as the economy expands. Gross domestic product grew 2.8 percent in the first quarter from a year earlier, rising for 11 quarters in a row, the Bank of Korea said on June 7.
“Residential property prices in South Korea will be sluggish or see a very slight increase,” said Young Il Choi, a vice president and senior credit officer at Moody’s Investors Service in Hong Kong.
Efforts to spur a stagnant property market are failing so far as households burdened with record debt prefer the nation’s archaic rental system, where deposits are paid to landlords who repay tenants years later without interest. The previous government attempted to stem access to cheap credit that fueled a building boom from 2004 to 2007 and led to a surge in household debt as speculators swooped.
Household debt in the first quarter was 911.4 trillion won ($791 billion), just shy of the record 911.9 trillion won in the previous three months, the Bank of Korea said on May 24. Average monthly income at households gained 6.9 percent to 4.1 million won in the first quarter from a year earlier, Statistics Korea said May 18.
The delinquency ratio for mortgage loans at South Korean banks stood at 0.79 percent as of the end of April, rising from 0.51 percent of total outstanding credit from a year earlier, the Financial Supervisory Service said on May 24 in a statement. The household debt delinquency rate, which includes mortgages and other credit, in April increased to 0.89 percent, the highest level since February 2007, according to the statement.
Bank of Korea Governor Kim Choong Soo said June 15 that the growing number of people who can’t afford to make payments on their home loans is a worry as policy makers brace for a slowdown amid Europe’s debt crisis. The delinquency rate among group loans for home buyers rose to 1.84 percent in April from 1.8 percent in March as price declines sparked transaction disputes, the FSS said. Group loans are arranged by developers and banks, and pool borrowing by buyers in large home and apartment projects.
Moody’s in April cited rising household debt and public-sector borrowing as “risk factors” for South Korea’s economy that could drag on private consumption.
“I expect the quality and delinquency of mortgage loans at Korean banks to be gradually deteriorating in the short- to medium-term,” said Moody’s Choi. Banks will see slower growth in their mortgage lending and lower profit from that segment, he added.
The 392 trillion won in total mortgage loans at the end of April was a record high and 46 percent more than the balance at the end of 2007.
Buyers in affluent parts of Seoul can borrow as much as 50 percent of a property’s value, up from 40 percent, to unwind “excessive regulations” on property markets introduced during the market boom in the mid-2000s, the finance ministry said in the statement on May 10.
“It’s a vicious cycle: Prolonged price declines are sapping demand, resulting in the deferral of settlements into new homes,” said Yang Hae Keun, a Seoul-based real estate market analyst at Woori Investment & Securities Co. “I expect even fewer deals to take place this year than last. The impact from the government’s latest steps will be negligible.”
The government of President Lee Myung Bak last year cut home sales taxes, lowered interest rates on loans for first-home buyers and encouraged banks to cut lending in floating-rate loans to reduce households’ vulnerability to swings in interest rates as part of measures to support the housing market and curb rising rent prices. It maintained a 50 percent debt-to-income rule, under which a borrower’s principal and interest repayments on a loan can’t exceed 50 percent of annual income, for some parts of Seoul.
The rate of household debt to disposable income in South Korea was 135.5 percent in 2011, the highest level since the Bank of Korea began tracking the data in 2003.
Floating-rate mortgages account for 95 percent of home loans in South Korea, compared with 10 percent in the U.S., according to 2009 data, the latest available, from the Financial Services Commission.
“Until recently, policy makers and banks didn’t have a sophisticated approach in managing the mortgage market,” said Jasper Kim, a professor at the Graduate School of International Studies at Ewha Woman University in Seoul and among the first to publicly predict that the housing sector would decline in 2009. “Banks wanted their money back relatively quickly, while offering short-term, floating-rate loans, which were less risky for lenders. Borrowers didn’t have much choice but to take them during the past decade.”
The central bank’s benchmark rate has been at 3.25 percent since June 2011.
The Korea Housing Finance Corp., the state-run residential funding provider, was the first to offer a 30-year fixed-rate mortgage in 2004 when the company was established, after years of the government encouraging banks to provide capital to companies to help the nation’s industrialization rather than to extend loans to individuals.
Kookmin Bank and Woori Bank, two of the nation’s top three mortgage lenders, are among banks now offering mortgages with maturities as long as 35 years. Banks’ average mortgage rate was 5.14 percent as of April, while the rate for new mortgages was 4.94 percent, according to Bank of Korea data.
As government efforts to revive the housing market have met with little success, rents are rising as more people like Yook forego buying homes. Rents have gained 0.7 percent so far this year, according to Kookmin Bank.
Under Jeonse, a form of long-term rental deposits favored by South Korean landlords, first introduced in the 1870s, a renter pays the owner a lump-sum, typically about half the value of the house, instead of a monthly rent. At the end of the two-year contract, the holder of the lease returns the deposit back to the renter without paying interest.
Property buyers widely used Jeonse as a financing tool in the 1980s and early 2000s when mortgage loans were scarce.
“I don’t believe in the mythology of undefeated housing prices I used to see back in the 1980s and 2000s any longer,” said Yook, who’s planning to move into smaller public housing once his 20-year-old son and 22-year-old daughter get jobs and move out. “I don’t see any merit owning a house.”