Kim Joon Hyung met more than 20 realtors and searched for months to find a place to rent in Seoul. In July, he finally signed a two-year contract on a two-bedroom apartment that requires him to make monthly payments, a rarity in South Korea where landlords and tenants have favored a century-old method of lump-sum deposits to lease homes.
“I finally gave up,” said 34-year-old Kim, a marketer at a home-appliance company who’s getting married this month. “This monthly charge rent home was the only thing available.”
South Koreans like Kim are increasingly choosing to rent rather than buy, driving up costs of leasing amid expectations that residential property prices, mired in the worst slowdown in 13 years, will fall further. Their loss of faith in the housing market prompted President Park Geun Hye to announce measures last month “to shift demand from rentals to home purchases,” including cutting home-purchase taxes, bucking a trend from Singapore to Hong Kong where governments are trying to curb potential property bubbles.
“For the government, it must be a big task to tackle rents with not much policy room,” said Choi Seong Heon, an analyst at Real Estate 114 Inc., a Seoul-based real estate information provider. The tax cuts “may spur transactions a little in the beginning, but the impact may be short lived. Tax cuts don’t seem enough to expel the anxiety over price declines.”
Home prices fell 4.3 percent from January 2012 through August in Seoul and the surrounding metropolitan area, according to Kookmin Bank data. The consumer price index that tracks rents gained 2.8 percent in the January-August period compared with the same period last year, more than double the 1.3 percent gain in the broader CPI this year, Statistics Korea said on Sept. 2.
“The rent price surge is evidence that people don’t believe that home prices will rise,” said Suh Jeong Yeal, a real estate and finance department professor at Youngsan University based in Gyeongnam province. “Why would people put their money into a depreciating asset? As long as pessimism dominates, people will stay in the rental market.”
Home prices in South Korea have been stagnant since they peaked in 2008 after a 41 percent surge in the previous four years elevated household debt to record levels. A shortage of supply in key metropolitan areas had undermined government measures from 2003 to 2007 to cool the market, such as higher property taxes and tougher mortgage lending rules that included introducing debt-to-income and loan-to-value ratios to reduce the amount borrowers could get from banks.
Efforts to breathe life back into the property market since 2008 -- including temporary tax cuts, relaxing the debt-to-income measures that apply to mortgage loans and increasing home supply -- have stumbled after the global financial crisis.
Not Hong Kong
The average apartment transaction price in Seoul was 488 million won ($444,000) in August, down 9.8 percent from January 2012, according to data from the Korea Appraisal Board, a state-run agency. In the capital’s metropolitan area, it was 332 million, dropping 9.2 percent in the same period.
South Korea stands in stark contrast to other parts of Asia, such as Hong Kong and Singapore, where governments have been struggling to come up with measures to prevent housing bubbles, partly because the nation’s property market relies largely on local demand, and like the economy, is more insular.
“The residential property market is also very closed, rigid and small,” said Suh at Youngsan University. “When there’s no ample internal demand to boost prices, there’s no incentives for foreign investors to join the market. That’s the key difference” between Seoul and international cities like Hong Kong and Singapore, Suh said.
Prices in the Seoul metropolitan area, where almost half of the nation’s 50 million people reside, fell 3 percent last year, the biggest annual drop in 13 years, according to data from Kookmin Bank, the nation’s biggest mortgage lender.
President Park, who took office in February, has identified reversing the sluggishness in the residential market as key to bolstering economic growth and to fulfill her campaign pledge to usher in a “people’s happiness era.”
The government will cut home-purchase taxes and increase the supply of cheaper mortgages to spur homebuying, as well as adding to rental housing stock and giving tax breaks on rental expenses for low-income households.
“Even people who can afford buying homes are now preferring to rent due to the concerns over prices dropping,” Park Won Gap, the senior real estate market analyst at Kookmin Bank, said. The steps “may persuade a limited number of people who are about to buy homes, but it won’t likely create massive new demand,” he said.
The nation’s rental market is also experiencing a shift. The lowest interest rates in at least six years and little prospect of capital appreciation if homes are sold, are prompting some South Korean landlords to abandon Jeonse, a lump-sum deposit rent dominant since the 1870s and widely used as a financing tool in the 1980s through early 2000s when mortgage loans were scarce.
Landlords typically used the upfront deposit -- which is returned to the tenant at the end of the rent contract -- as a down payment on other properties when prices were rising.
Now they are opting for contracts that stipulate monthly rents because there is little prospect of capital gain if they buy another home, and returns from bonds and stocks are lower than rental yields.
The number of monthly rent contracts jumped 23 percent in the first seven months of this year from the same period in 2012, according to the land ministry data. They accounted for 39 percent of all rent transactions in the seven months through July, the highest proportion since the ministry started gathering the data in 2011 as more landlords began asking for monthly leases.
“Monthly rents will be the major stream sooner or later,” said Youngsan University’s Suh. “We may see the emergence of home rental companies like in Western countries. The Korean rental market is facing structural change.”
The average Jeonse rent for Seoul apartments was 280 million won in August, gaining 4.5 percent from January 2012, and 197 million won in the metropolitan area, up 3.6 percent in the period, according to the Korea Appraisal Board.
Yields on monthly rents are about 6 percent to 10 percent annually, according to the Aug. 28 government statement.
The average rate for new timed and savings deposits at Korean banks was 2.64 percent in July, according to Bank of Korea data. The central bank on Aug. 8 left the benchmark interest rate at 2.5 percent, the lowest level since 2011.
The Kospi stock index has dropped 2.1 percent this year and was up 0.2 percent at the close of trading in Seoul, while the yield on three-year government bonds that mature in June 2016 rose to 3 percent, according to data compiled by Bloomberg.
Charging monthly rents is “a much better deal for home owners in the low-rate era,” said Park. “There are not many investment tools for home owners with the deposit money received from renters. It’s a very reasonable economic activity for landlords to turn to a monthly rent system.”
A day before South Korea unveiled its latest steps to stimulate the housing market, Singapore said that it will cut the maximum tenure for new housing loans and restrict foreign permanent residents from buying government-built homes.
Hong Kong in February said it would double a sales tax on property costing more than HK$2 million ($258,000) and targeted commercial real estate in the government’s latest and harshest measures as bubble risks spread.
Meanwhile, South Koreans are still smarting after prices tumbled following the 2005-2008 boom and economic growth is at risk from a slowdown in China and record household debt.
Homebuyers “were horrified by their experience, leaving a buzzword like house-poor and chilling sentiment on the property market,” said Choi at Real Estate 114. “After the 2008 global financial crisis, people have become more nervous about their future income amid an uncertain economy. It’s hard to lure the young, new demand into the buying market.”
Kim, the renter is one of those reluctant to take the plunge and buy a property. He is resigned to paying the 1 million won ($900) in monthly rent from this month because he says he has little faith in home prices going up.
“Paying mortgage interest to banks and paying rents to landlords, what’s the difference?” he said. “At least, I can avoid a nightmare of losing money from the house financed with debt.”