Author: Li Yunfei | Source: Original
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South Korea is currently facing an imminent real estate downturn, the severity of which is expected to exceed the slump following the financial crisis from 2009 to 2014. Some analysts even believe that South Korea could become the starting point for the next Asian financial crisis.
Why do they say so? Let's take a look at the current state of South Korea's real estate market to understand.
The housing prices in South Korea have been falling for eight consecutive months. Some apartments in Seoul have lost 30%-40% of their peak value. In December 2022 alone, housing prices dropped by 12%, marking the largest single-month decline in South Korea since 2003. Data shows that the transaction volume of apartments in Seoul plummeted by over 70% in the middle of last year.
At this moment, landlords who bought at high prices may wake up to find their assets have vanished into thin air, amounting to hundreds of millions of won, which could be a devastating blow.
In the meantime, to adapt to the market, South Korean real estate developers have started offering incentives such as free smartphones, gold bars, and even Mercedes-Benz cars with the purchase of a property, yet these offers have gone largely ignored.
Now, with the plummeting housing prices in South Korea, both landlords and tenants are burdened with mortgages that they may never be able to pay off in their lifetime, and the outbreak of a financial crisis in South Korea is just a thought away.
We must recognize that South Korea's housing prices rank second in the world, with Hong Kong being the first. Over the past decade, housing prices in Seoul have skyrocketed by a staggering three times. From 2017 to August 2022, the increase in housing prices in Seoul reached as high as 87%, and even during the pandemic, South Korea's housing prices continued to surge by 40%.Thus, we cannot help but ask, how could such a good real estate myth shatter so suddenly? Regarding this, I will discuss from two aspects.
First, the result of the won's interest rate hike.
Under the pressure of the US dollar's interest rate hike, South Korea has also begun a series of interest rate hikes in recent years. From August 2021 to July 2022, South Korea carried out six interest rate hikes, totaling 250 basis points by the end of last year. In January of this year, South Korea once again raised the benchmark interest rate, which is now at 3.5%, the highest level in 14 years.
With the benchmark interest rate increased, the mortgage interest rate will also continue to rise. Under pressure, landlords are unable to repay their mortgages, and in the end, they can only reluctantly sell their houses at a low price. With everyone selling houses, the housing prices naturally come down.
Of course, this is not the main reason; the more fundamental issue is yet to come. Let's continue to look further.
Second, the model of full rental housing in South Korea.
South Korea has a very unique full rental housing model, which is that as long as you pay the landlord a deposit of 50-80% of the total value of the house in one lump sum, you can rent the house for free for two years, and after two years, the landlord can return the deposit to you in one lump sum. As for young people who do not have such a large deposit, it is not a problem, as the South Korean government can also provide low-interest full rental loans for young people.
This strategy was very effective under the conditions of continuously rising housing prices and low bank interest rates because tenants could borrow money from the bank to pay the full rental deposit, and the interest they needed to pay each month was only a quarter, or even less, than the ordinary monthly rent. In this way, everyone could save the money they saved and buy their own house as soon as possible.Therefore, in recent years, the whole rental method has become very popular in South Korea, accounting for more than 70% of the rental market during its peak period. Landlords are also delighted because they can use interest-free loans to purchase another property. They believe that even after the lease expires, they can immediately find new tenants, and the money will be permanently at their disposal.
According to South Korean real estate data, in July 2020 alone, the number of cases recorded in the Seoul area of people buying houses with whole rental deposits reached 2,976 households.
A significant part of South Korea's real estate market has risen and fallen due to this reason. As bank interest rates continue to rise, landlords face increasing pressure to repay loans each month. Coupled with the inability to sell their properties, they are no longer able to return the deposits to their tenants.
Moreover, after the real estate bubble burst, rental prices have also fallen. Many tenants who paid the whole rent found that as soon as rental prices dropped, they immediately demanded to move out and asked the landlords to return their deposits. But at this point, where do the landlords have the money to return the deposits? The only way out is to flee.
Thus, the housing market has shifted from a seller's market to a buyer's market, and landlords who bought houses with whole rental deposits can only sell their properties at low prices, falling into a vicious cycle.
For the tenants, who initially aimed to save a significant amount, they ended up with landlords fleeing and losing their deposits. Although they can sue the landlords, this path is exceptionally challenging.
Now, due to the plummeting housing prices in South Korea, both landlords and tenants are burdened with mortgages that they cannot repay in a lifetime, and the myth of South Korea's real estate market has shattered!
According to statistical data, in 2022, the average debt of South Korean households exceeded 90 million won (approximately 480,000 RMB), double that of a decade ago. In the fourth quarter of 2022, South Korea's overall personal consumption decreased by 0.4%. In March of this year, the global happiness survey report released by the Ipsos Group showed that among 32 countries, South Korea ranked 31st in resident happiness in 2022, just above Hungary.Please provide the text you would like translated into English.
