“Buying the house in 2021 might be one of the biggest regrets of my life,” said Kim Myung-soo, a 33-year-old whose home in Jamsil, east Seoul, has lost about $400,000 in value. His wife is 33 weeks pregnant and Mr. Kim does not know how to pay off the mortgage. He had planned to wait for rising prices before selling the property to pay off the loan.
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Mr. Kim is not alone in his worries. Across the rich world, real estate markets are looking precarious. Few are doing as badly as South Korea. In December alone, home prices fell 2%, the largest monthly decline since official numbers began in 2003. The slump for housing in Seoul has been particularly brutal, with prices down 24% since peaking in October 2021.
The South Korean market offers a glimpse of what might lie ahead elsewhere. The Bank of Korea (A book) began raising rates in August 2021, seven months before the Federal Reserve and nearly a year before the European Central Bank. The policy rate is now at 3.5%, a 14-year high after officials hiked it again in January.
The broader economy is feeling the pinch. Private consumption fell by 0.4% in the fourth quarter of 2022. And exports, which fell 17% yoy in January, did little to cushion the blow. They were hit by a slump in semiconductor orders at the end of a pandemic boom in electronics sales. This inertia will only add weight to house prices.
There are other sources of stress as well. Household debt reached 206% of disposable income in 2021, well above even the 148% in mortgage-loving Britain. About 60% of South Korea’s home loans are floating rate, in contrast to America, where most loans are fixed-rate. As a result, household finances are squeezed more quickly when interest rates rise. The danger is that buyers like Mr Kim will become forced sellers – something he is trying to avoid at all costs – meaning a fall in house prices will lead to a collapse.
This risk is compounded by the country’s bizarre rental system, known as jeonse. Many renters pay huge lump sums to landlords, often 60-80% of a property’s value, which are repaid after two years. In the meantime, the landlord can invest the money as he pleases. The system is a relic of South Korea’s rapid industrialization, when mortgages were even harder to come by.
In a downturn, some landlords are forced to make fire sales to compensate evicting tenants after investing in risky assets, including more housing, and losing the money. Stories of sudden bankruptcies and disappearing “villa kings,” owners of dozens of rental properties, circulate.
South Korea also shows how high household debt and asset prices can constrain monetary policy. Opinions are divided on whether the vulnerability of the housing market and the impact on household incomes will stop it A book raise interest rates further. Oxford Economics, a research firm, thinks so A book will continue. Bank Nomura expects to reverse course in May and cut interest rates to 2% by the end of the year.
Most countries are not as exposed as South Korea. But some, including Australia, Canada, the Netherlands, Norway and Sweden, share the same mix of high household debt and soaring house prices. All have started raising rates after South Korea and need to go further before the pressure eases. You face a rocky ride. ■
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