The Korean Housing Market: Its Characteristics and Policy Responses
The Korean housing market has gained strength centering around the Seoul metropolitan area (SMA) since 2014, when it started to recover. Against the backdrop of low interest rates, the easing of real estate regulations has pushed up expectations of higher housing prices, which has led to greater demand for housing as an investment. Expectations of housing price rises, coupled with greater incentives for financial institutions to provide home mortgage loans, have caused household debt to grow rapidly. In order to stabilize the housing market in the SMA and contain the rapid household debt buildup, the Korean government has instituted comprehensive and tailored policy responses since the second half of 2017. The government’s sweeping responses cover many different areas, including macroprudential, housing and tax policies. The ranges and intensities of the policies differ by region, by household status (whether it owns houses or has taken out mortgage loans) and by the type of demand (speculative or residential) so as to increase their effectiveness and minimize any negative side effects. Thanks to the government’s policy responses, the rapid buildup of household debt has slowed recently, and the housing market in the SMA is gradually stabilizing.
KeywordsHousing market Seoul metropolitan area Household debt Comprehensive and tailored policies
1 Recent Housing Market Developments
1.1 Housing Price Trends
Apartments account for 60% of all housing in Korea,2 and since 2014 apartment prices in the SMA have risen far faster than those in the NSMA (Fig. 16.1c). In particular, the growth rate in Seoul from the first quarter of 2014 to the fourth quarter of 2017 (31.2%) exceeded the national average (12.6%) by 18.7pp (Fig. 16.1d).
1.2 Supply and Demand
The demand for housing has grown with the rise in the number of one- and two-person households (Fig. 16.2b) as a result of, for example, shrinking household size in the course of population aging (Oh et al. 2017). In particular, the annual rate of growth in the number of households is higher in the SMA (2.1%, 2000–2017) than the national average (1.8%), due to the faster growth in one- and two-person households there.
2 Structural Characteristics of the Korean Housing Market
The Korean housing market is characterized by the dominance of apartments among housing types, by considerable demand for housing for investment purposes, and by household-led supply of rental housing.
2.1 Apartments as a Dominant Form of Housing
On the demand side, the younger generations prefer apartments, as do the middle-aged because of apartments’ high liquidity (Fig. 16.3b). They can cash in their property assets after retirement. The proportion of apartments is considerably higher in the SMA (63.2%) and other large cities (63.9%) than in the rest of the country (57.5%).3
2.2 Demand for Housing as an Investment
Meanwhile, the popularity of jeonse,5 a leasehold deposit system unique to Korea, tends to make it easy to purchase homes for investment purposes through so-called gap investment. It allows home buyers to easily finance a sizeable portion of the purchase price in the form of the deposits they receive for leasing the housing out. The amount of deposit is referred to as jeonse price.6
2.3 Household-Led Supply of Rental Housing
The Korean rental housing market differs from those in other major countries in that the household sector, more so than the public or corporate sectors, plays the main rental housing supplier role. Korean households supplied 78.9% of total rental housing at the end of 2015 (compared to 13.7% by the public sector, and 7.4% by the corporate sector), well above the figures in major countries such as the US (56.3%), the UK (53.1%), Germany (64.1%), and Japan (66.5%).
Meanwhile, jeonse tenancies, which do not occur in other major countries, accounted for 35.9% of the total rental housing supplied by households in 2016 (Fig. 16.5b). The share of jeonse is also much higher in Seoul (45.3%) and the SMA (42.0%, regional average) than in the NSMA (25.0%).
3 Recent Buoyancy in the SMA Housing Market
The buoyancy of the housing market in recent years, particularly in the SMA, has been driven by three factors—the persistently low interest rates, the easing of real estate regulations, and the stronger incentives for financial institutions to supply mortgage loans.
3.1 Persistently Low Interest Rates
Meanwhile, as jeonse prices for homes have increased faster than their sales prices, and borrowing costs have become lower, demand from households switching from rental to ownership of housing has also grown. The proportion of jeonse tenants purchasing their own units rose from 7.4% in 2013 to 10.4% in 2016.
3.2 Easing of Real Estate Regulations
3.3 Stronger Incentives for Financial Institutions to Provide Mortgage Loans
The incentives for financial institutions to provide mortgage loans have strengthened, due largely to the low risk weights applied to household loans for BIS capital ratio purposes,11 as well as to rising credit risks in the corporate sector in line with its ongoing restructuring.
These stronger incentives for financial institutions to provide mortgage loans, combined with expectations of higher housing prices, have worked as major factors contributing to the surge in household debt (Fig. 16.7b). As the supply of new homes expanded in line with the easing of real estate regulations, the related mortgage lending has also increased, leading to a sharp rise in household debt.12
4 Policy Responses
The Korean government has introduced comprehensive and tailored policy measures since the second half of 2017 in order to stabilize the housing market in the SMA and curb the sharp rise in household debt (FSC 2017a, b). The government’s responses have been sweeping, and cover macroprudential, housing and tax policies related to household debt and the housing market. Further, in order to enhance policy effectiveness and minimize any negative side effects, the government has devised measures that vary in range and intensity depending on the target regions, the households concerned, and the types of housing demand.
4.1 Comprehensive Measures
In an attempt to manage total household debt and curb financing for speculative purposes, the government has been active in using macroprudential policies, including tightening of the regulations on all financial institutions and loans, while also developing comprehensive and systematic criteria for loan screening.
The government has tightened the LTV and DTI requirements greatly (from 70% to 40%) in August 2017, and has limited the number of home mortgage loans per household, for example from one loan per borrower to one loan per household in speculation-prone areas. To prevent any leakage from the home mortgage loan regulations, a debt service ratio (DSR) has been introduced to mandate comprehensive assessment of borrowers’ debt servicing capacities for all financial institutions’ loans, and will be effective from October 2018. In addition, to limit financial institutions’ incentives for supplying excessive household loans several regulations have been introduced in January 2018, including an upward adjustment of the Basel risk weight from 35% to 70% for high-risk home mortgage loans with LTVs over 60%.
The government has implemented policies to curb speculative demand for new apartments and for apartments scheduled for reconstruction, as that has been a main factor behind the rise in housing prices in the SMA. It has tightened the criteria for top-priority subscribers for new apartment purchasing rights, while limiting their resales by imposing a higher capital gains tax on them. The government has also tightened the requirements for apartment reconstruction, by for example revising the safety criteria for approving reconstruction projects.
The taxation of housing investment has been strengthened, to curb demand for investment purposes and to heighten tax fairness. The government has raised the transfer income tax on owners of multiple homes, which became effective from April 2018, and imposed levies on excess earnings from reconstruction in January 2018. Discussions on revising the property holding tax on owners of multiple homes and expensive homes are also ongoing. This could be a more effective means of controlling housing demand for investment.
4.2 Tailored Responses
The target regions for the tighter regulations are sub-divided into speculative investment zones, overheated zones and adjustment-required zones, depending upon their respective degree of housing price rises and overheating. Each zone is subject to a different level of regulation.13 The Gangnam districts in Seoul were designated as speculative investment zones, and are subject to the strongest regulations. Other parts of the SMA and the provincial cities are subject to relatively relaxed regulations.
The level of regulations applied to households varies depending upon whether they own multiple homes, or have taken out home mortgage loans. Households that own multiple homes are subject to a 10–20pp transfer tax add-on. Households owning only single housing units benefit from tax exemptions only after they have lived in their homes for two or more years. When a household with an existing home mortgage loan seeks an additional loan for a housing purchase, the applicable LTV and DTI ratios will be tightened by 10pp each.14
By Housing Demand
Housing demand is categorized into demand for speculative and for residential purposes. The government strictly regulates speculative demand, while providing active support for residential demand. Speculative demand is strictly controlled through tighter screening of the financing methods involved and checking on the owner-occupancy status of the borrower. On the other hand, LTV and DTI ratios are relaxed for low-income households purchasing homes for residential purposes, in order to alleviate their financing difficulties.
5 Policy Evaluation
Despite the government’s announcement of its housing market stabilization plan in August 2017, and its partial implementation thereof, housing prices in the SMA continued to rise for some time. In 2018, however, they have shown slower growth as the effects of the government’s policies have begun to take hold (Fig. 16.8b).
For long-term housing market stability it should be noted, however, that demand-reduction policies alone cannot stabilize the housing market in the SMA. There is a structural imbalance between the limited supply of new housing in that area, and the continually growing demand for it.
The SMA includes Seoul, Incheon and Gyeonggi (GG). The non-SMA region, NSMA, consists of five major cities and eight provinces. The five major cities are Busan, Daegu, Daejeon, Gwangju and Ulsan, and the eight provinces Gangwon (GW), Chungbuk (CB), Chungnam (CN), Jeonbuk (JB), Jeonnam (JN), Gyeongbuk (GB), Gyeongnam (GN) and Jeju (JJ).
In Korea, apartments refer to five or more story residential buildings. Most apartment complexes have facilities nearby such as supermarkets, schools and district offices as well as easy access to public transport.
The large cities include Seoul and six major cities (Incheon, Busan, Daegu, Daejeon, Gwangju and Ulsan).
Since apartments in Korea are standardized, they have advantages in terms of being sold and leased out.
Under this system, a homeowner rents a housing unit upon receiving a certain leasehold deposit from the tenant, and returns the deposit once the contract period ends.
In 2017 the national average jeonse-to-sales price ratio for apartments was 74.6%.
When the gap between the housing sales and jeonse prices is small, investors purchase homes by only investing this difference (gap). They then lease the homes and later gain profits by selling them when their sales prices rise.
Here, the debt-to-income ratio is calculated by dividing the sum of annual principal and interest payments of a mortgage and annual interest payments of other debts by annual income.
Previously apartments had to be at least 40 years old to be eligible for reconstruction, but the government has eased that threshold to 30 years for apartments in the SMA and other large cities. This has significantly expanded the range of apartments eligible for reconstruction.
In order to purchase a new apartment in Korea, one must be selected from a pool of subscribers. The qualifications for being prioritized to bid in new apartment pre-sale markets were eased to attract more demand.
The risk weights on household and home mortgage loans averaged 22.5% and 19.2%, respectively at the end of 2017, far below 55.5% for corporate loans.
In line with the strength of the housing market since 2014, Korean household debt grew by 10.9% in 2015 (year-end basis) and by 11.6% in 2016, but the growth slowed to 8.1% in 2017 on the effects, for example of the government measures to stabilize the housing market (of August 2) and curb household debt growth (of October 24). Despite this slowdown, the pace of growth in debt still outstrips that in income, and Korea’s household debt-to-nominal GDP ratio (household credit statistics basis) has thus continued to increase, from 73.0% at end-2014 to 81.8% at end-2016 and 83.8% at end-2017.
See appendix for a detailed explanation.
When a home mortgage loan borrower purchases an apartment in one of the overheated regions, the borrower will be subject to tighter LTV and DTI ratios (30% instead of 40%).
- Bank for International Settlements. (2018). Residential property prices: Selected series (nominal and real). Accessed July 1, 2018, from https://www.bis.org/statistics/pp_selected.htm
- Bank of Korea. (2017). Financial Stability Report 2017(6). Google Scholar
- Financial Service Commission. (2017a). FSC tightens mortgage rules to curb speculative demand in housing market. Financial Service Commission Press Release 2017(8). Google Scholar
- Financial Service Commission. (2017b). Comprehensive measures for household debt management. Financial Service Commission Press Release 2017(10). Google Scholar
- IMF. (2017). Global Housing Watch 2017(Q1). Google Scholar
- Korea Appraisal Board. (2018). Accessed July 1, 2018 from http://www.kab.co.kr/kab/home/eng/main.jsp
- Ministry of Land, Infrastructure and Transport. (2018). Accessed July 1, 2018 from http://stat.molit.go.kr
- Oh, K., Kim, S., Yoon, J., Ahn, S., & Kwon, D. (2017). Impact of population aging on the housing market. Bank of Korea 2017-25. Google Scholar
- Statistics Korea. (2018). Accessed July 1, 2018 from http://kostat.go.kr/
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