For the past few years, Seoul property was arguably the best investment you hadn’t considered. Strong demand and soaring prices created a great opportunity. However, after nine rounds of government intervention, the searing real estate market in Seoul may be growing cold.
South Korea has some of the most foreign-ownership friendly laws in all of Asia when it comes to real estate. Seoul is naturally the hub of property investment activity as the country’s capital and largest population centre. Apartments are the preferred unit type for many investors as these are in high demand from renters.
It is estimated that up to 90 percent of the Seoul metropolitan area population in their 20s and 30s are renters. Even with the unusual Jeonse renting process found in the country, property investors can be confident that their unit is unlikely to sit empty.
Market stability is also something that makes the Seoul property market attractive. Even the impeachment of former President Park Geun-hye in 2017 and the looming threat of North Korea weren’t enough to dent rising home prices.
The real estate market was resistant to President Moon Jae-in’s attempts to cool it as well. Government measures enacted since he took office in 2017 included more home loan restrictions and the creation of anti-speculation zones in Seoul that have stringent regulations in place. It took far longer than the government had hoped, but the frigid January weather brought with it signs that the Seoul property market was beginning to cool off.
When 2018 came to a close, the Korea Appraisal Board found that Seoul apartment prices rose by 8.22 percent from the previous year. This was the highest price increase in 12 years and concluded a hot streak that no one seemed able to derail.
Perhaps the most surprising news came in the first quarter of 2018 when Seoul became the top luxury property market in the world on Knight Frank’s Prime Global Cities Index for Q1 2018. The city jumped over Guangzhou to claim the top spot thanks in large part to a staggering 24.7 percent annual price growth.
Seoul’s Gangnam district saw some of the most significant home price jumps. Information from the Korea Appraisal Board found that the average apartment price in Gangnam increased by nearly KRW 200 million (USD 178,000) between May 2016 and May 2018.
So, what led to all this? Most experts point to one action as the root cause.
The Bank of Korea implemented eight rounds of interest rate cuts between 2012 and 2016. An article in The Korea Timespointed out that the rate cuts have helped spur home prices and household debt in the country to record levels. More people took out loans to buy homes with everything boiling over in the first half of last year.
Temperature check for the Seoul property market
January temperatures in Seoul dip below freezing with regularity. And while the property market hasn’t yet fallen to those chilly depths, cooling has begun, at least in the short term.
The tide started to turn in December when Seoul apartment prices fell for the first time in over a year, albeit only declining by a tenth of a percent. Meanwhile, the Ministry of Land, Infrastructure and Transport reported that home sales fell dramatically in January of 2019, dropping by 8.9 percent.
The apartment sector was the hardest hit, falling to a six-year low in terms of transactions, according to statistics from the Seoul Metropolitan Government. Most experts believe transactions will be subdued throughout 2019, but are less certain about home prices.
A pair of recent reports from KB Financial Group surveyed financial experts and real estate professionals. The findings of the reports were mixed. Nearly 60 percent of the financial experts asked thought Seoul property prices would increase in 2019. However, the realtors disagreed with 70 percent believing Seoul home prices would drop this year. However, both groups predicted a decline in property transactions for Seoul this year.
The housing situation, coupled with a slowing economy and continued US-China trade war uncertainty, could have a far-reaching impact on South Korea.
“Elevated housing prices threaten severe growth downturns if prices reverse abruptly. Housing prices that have undergone sharp and sudden reversals, empirical studies showed, tended to be associated with longer and deeper slowdowns,” an Asian Development Bank representative told The Korea Times.