Seoul Elevated Housing Prices and Strict Regulations Stir Up Provinces... Concerns Over 'Hot Potato' Effect

Investors Move to Provinces Due to High Housing Prices, Interest Rate Hikes, and Regulations
Concerns Over Immediate Impact if Buying Momentum Stops Amid Market Slump

Apartment view of Seoul city seen from Namsan, Seoul on the 2nd ＜Photo by Yonhap News＞

"We jointly own a house in Seoul under both spouses' names. I have about 100 million KRW in cash; is there anywhere to invest?" (A post on a real estate-related community board)

Recently, online community boards related to real estate have been flooded with posts about investments using small amounts of surplus funds. These are novice investors trying to invest with as little as several tens of millions of KRW. This phenomenon has emerged as house prices continue to rise sharply despite the government's strong regulations and interest rate hikes.

Experts diagnose that the recent stir in local housing prices, especially in metropolitan cities, is closely related to this atmosphere. With Seoul housing prices soaring and investment routes blocked by strict regulations such as loan bans, liquidity is flowing into local areas.

◆ Liquidity blocked by regulations flows to local areas = According to the Korea Real Estate Board on the 3rd, the sales-demand index for the five major metropolitan cities excluding Incheon was 104.1 this week (as of August 30), up 1 point from last week (103.1). The sales-demand index quantifies the balance between demand and supply by analyzing surveys from member brokerage offices and the number of online listings. The closer to '0', the more supply exceeds demand; the closer to '200', the more demand exceeds supply. Surpassing the baseline of 100 indicates stronger buying sentiment.

Despite the Bank of Korea raising the base interest rate by 0.25 percentage points and some commercial banks halting new mortgage loans, buying sentiment remains resilient. Various real estate communities are flooded with posts asking for places to invest with 100 to 200 million KRW as alternatives to Seoul and the metropolitan area. As housing prices in Seoul and the metropolitan area have risen too much and loan capacity has decreased, these investors are engaging in remote investments that allow relatively small investments.

Investment enthusiasm is also strong in local small and medium-sized cities outside the five major metropolitan cities. This is a balloon effect caused by the government expanding housing regulations not only in the metropolitan area but also in local metropolitan cities. Currently, most metropolitan cities are designated as regulated areas such as speculative overheating zones and adjusted target areas. Because of this, resale of pre-sale rights is restricted, and a mandatory declaration of funding plans is required when acquiring housing. The loan-to-value ratio (LTV) and debt-to-income ratio (DTI) for mortgage loans are also low. In contrast, local small and medium-sized cities are 'regulation-free zones.'

In fact, in the first half of this year, the total number of apartment sales nationwide was 373,014, of which 103,209 were purchases by residents outside the jurisdictional city or province. This means about 3 out of 10 apartments nationwide (approximately 27.7%) were bought by outsiders. Among these, the average inflow ratio of outsiders in apartment markets outside the five major metropolitan cities was about 30.8%. Particularly, Chungnam (39.7%), Chungbuk (37.1%), and Gangwon (35.2%) showed high ratios.

Seo Jin-hyung, president of the Korea Real Estate Society (professor at Gyeongin Women's University), analyzed, "In a liquidity surplus situation due to low interest rates, regulations in the metropolitan area are becoming stronger. Investment funds lose their destination and flow into local areas without regulations."

◆ If buying momentum stops, local areas will be hit first... "Concerns for actual demand" = However, as apartment prices have surged rapidly in a short period, concerns about a bubble are growing. While there is no problem during a general uptrend, if the market shrinks, local areas with relatively fewer actual demanders are likely to be hit first. A real estate industry expert explained, "Local markets originally operate strictly based on actual demanders. The current rapid price increase is due to remote investments by outsiders, and if they withdraw later, actual demanders who bought at high prices may suffer losses."

Some experts already foresee that housing prices in some local areas are nearing their peak. Since rural areas are experiencing population decline and economic stagnation, many point out that housing prices formed by bubbles may not recover.

Professor Seo said, "The rise in local real estate prices is not based on the real economy but is greatly influenced by liquidity and regulations. As housing supply increases in the future, bubbles in local city real estate may burst."

Kwon Il, head of the research team at Real Estate Info, also explained, "If prices rose solely due to excessive expectations or outsider investments, there is a high possibility of a bubble burst. In fact, some areas have seen prices rise to dangerous levels."

This content was produced with the assistance of AI translation services.