Korea’s real estate market is showing signs of overheating. Housing prices which had kept steady for some time suddenly saw a sharp rise, with apartment prices in Seoul reaching a 10-year high. With the real estate market heating up, the increase in household loans has also more than doubled in the past two months and contributed to the recent surge in household debt. We will take a closer look at what needs to be done to solve this issue with Jo Young-moo from the LG Economics Institute. First, let’s take a look at the red-hot real estate market.
Even until the end of last year, many forecast that the real estate market would enter an adjustment phase. But in the last couple of months, housing prices started to see a sharp rise centered around Seoul, the neighboring Gyeonggi-do Province, and Sejong City. The areas with higher demand for new housing are seeing the biggest rise. For example, the four districts in Gangnam which have a higher percentage of older housing compared to other districts have seen a big increase. As such, speculative demand is driving up house prices there and in other areas too. This has destabilized the real estate market and is increasing the housing cost burden on regular citizens.
Seoul and neighboring Gyeonggi-do Province are the areas leading the housing price increase, as well as the administrative city of Sejong. The four districts in Gangnam where large reconstruction complexes are clustered in, such as Gangnam, Seocho, Songpa and Gangdong, saw a 1.14% increase in their apartment prices last month. Bundang, Gyeonggi-do Province, saw apartment prices rise by ten million won, and Sejong City’s apartment prices after the presidential election rose 1.48%. The real estate market started heating up around the May presidential election. But what led to the sharp rise in housing prices?
If we take a look at where housing prices are going up, it is in regions where there is high demand to own one’s own home, but not enough new houses. Prices are also going up for rebuilding projects that begin this year as they will be able to avoid “excess profit restitution”. With floating funds already in the market and not many suitable places for investment, investor sentiment for the real estate market seems to be on a recovery track, leading to the price increase.
Many different factors are contributing to the recent surge in real estate prices. For the four districts in Seoul’s affluent Gangnam area, there is a lot of demand but not enough supply. With rebuilding projects beginning for old apartment complexes in the area this year, investors are flocking to the scene as they can avoid the so-called “excess profit restitution” law which stipulates one must pay taxes on a certain portion of profits from rebuilding projects. The 1,010.3 trillion won worth of floating funds looking for a place to invest as of the end of last year is also adding fuel to the fire. As the real estate market is heating up, people are taking out investment loans, worsening the already serious household debt situation.
Total household debt is now 1,360 trillion won, which is too high. In particular, the ratio of household debt to disposable income of households, which can measure the ability to repay debts, is 170%, which is excessively high. As such, this phenomenon is raising fears that it can lead to a deterioration of household budgets or increase debt repayment burdens, which could lead to a contraction in domestic consumption.
With the property market showing continuous price hikes, household loans surged from 100 million won in January to 6 trillion won in May. As such, household debt for the first quarter increased 17 trillion won compared to the end of last year, reaching a record high of 1,359 trillion won. With the situation getting worrisome, the government will carry out a full-scale investigation into the real estate market starting this week. Speculation is growing that the government might put out regulatory measures based on the investigation, focusing on overheated areas.
Many are focusing on how the loan-to-value and debt-to-income ratios will change upon the regulation's expiration at the end of July. The Park Geun-hye administration allowed households to easily borrow money by raising the loan-to-value and debt-to-income cap ratios in July 2014. The deregulatory move has been criticized for snowballing household debt and causing real estate speculation. Since the deregulatory move will automatically terminate if it is not extended, it is highly likely that the new administration will not extend it to rein in household debt. Another idea that is under discussion is managing the total amount of household debt. In other words, the government wants to limit the increase in the loan amount by each quarter or each month, for example, to 2 trillion, 3 trillion, or 5 trillion won to keep household debt under control.
The most likely scenario is the government's strengthening of loan-to-value (LTV) and debt-to-income (DTI) ratios, which restrict mortgage size depending on income and house value respectively to tackle household debt. The destabilizing measures are set to expire at the end of July, so the government is expected to lower the current LTV ratio from 70% to 50%. The DTI ratio is expected to be lowered as well from the current 60% to 50%. In addition, debt service ratios (DSR), which include credit loans and overdraft loans, will also be strengthened to tackle debt. However, just tightening measures on household loans will prevent actual buyers from buying a home and increase the burden on those who need loans to make ends meet. It can also cool down the economy that has just started to recover.
Household debt increases from the supply of financial institutions who want to lend money and the demand of households wanting to borrow money. So, it may be difficult to stop the sharp rise in household debt by just tackling one side and making it difficult for financial institutions to lend money. There can be many different types of loan demand. For example, there can be real demand from actual home buyers, speculative demand, demand from households in debt who need living expenses, or demand from self-employed business owners needing funds. So, even if it takes time, the government must prepare measures that can tackle household debt in a more comprehensive way. The most important part would be to make it so that households would not have to get loans at all. The Moon Jae-in government should focus more on income-led growth so that it can become a more substantial measure against household debt.
Instead of focusing just on the debt itself, the government should take a more fundamental approach to help improve the income and livelihood of citizens. That is why the Moon administration has announced it will come up with more comprehensive measures even if it takes longer, and announce them in August. We will have to wait and see if those new measures will be able to lower household debt and revive the economy.