House Prices Cooling Off... Entering Decline? Rebound? Experts Are Unsure

Seoul Housing Prices Fall for 3 Consecutive Weeks... Sharp Increase in Declining Transactions
Apartment Transactions Remain Above 1,000 for 3 Months
Loan Regulations Tightened and Additional Base Rate Hike Indicated, Increasing Interest Burden
Meanwhile, Transaction Decisions Deferred Ahead of Presidential Election... Listings Not Increasing Significantly
Ruling and Opposition Candidates Propose 'Regulation Easing' and LTV 80-90% Pledges
Possibility of Real Buyers Returning to the Market

[Asia Economy Reporters Kim Hyemin and Ryu Taemin] Is it the beginning of a downturn or the eve of an upswing? As Seoul housing prices have fallen for three consecutive weeks recently, forecasts for the real estate market after the presidential election are divided. For now, reality signals that the market has entered a correction phase. Apartment transaction volumes have remained in the 1,000 range for three consecutive months, indicating a continued absence of transactions. Based on this, there is a 'major downtrend theory' that expects the decline to deepen.

On the other hand, there is also a 'long-term correction theory' that predicts the current correction period will last for an extended time. Conversely, the 'major uptrend theory' that foresees a brief correction followed by a return to an upward phase is also significant. The divergence in forecasts stems from mixed signals in the market that predict both rises and falls. Skyrocketing housing prices, continuously rising interest rates, stagnant supply, and presidential candidates' promises to ease regulations?all these variables influence the outlook depending on which factors are weighted. In such a confusing period, what market participants can do is observe the small changes caused by early warning signs.

"Transaction Cliff Signals Start of Downturn"... Downtrend Forecast Gains Momentum

The basis supporting the 'major downtrend theory' is that the burden on buyers has increased due to housing prices soaring to unprecedented levels, coupled with tightened loan regulations and rising interest rates making financing more difficult. Professor Han Mundo of Yonsei University's Department of Finance and Real Estate explained the current situation: "As housing prices have surged, demand to buy homes has decreased, leading to reduced transaction volumes and continued price declines." According to the Seoul Real Estate Information Plaza, apartment transaction volumes in Seoul, which were in the 4,000 range last year, dropped to 1,366 in November, 1,125 in December, and 854 (provisional) in January, showing a clear downward trend.

As homes fail to sell, the proportion of transactions at lower prices is also increasing. According to nationwide apartment transaction data submitted by Democratic Party lawmaker Kim Hoejae from the Korea Real Estate Board, 54.3% of Seoul apartment transactions in December last year were at lower prices. This is nearly a 20 percentage point increase from 35.1% in September last year. Song Seunghyun, CEO of Urban and Economy, explained, "If lower-price transactions were isolated cases, they would lack representativeness, but as their proportion increases, the long-term price trend can shift to a downward trajectory. This is the same logic as the increase in new record prices during an uptrend sustaining the price rise."

Experts cite the fundamental cause of lower-price transactions as a decrease in buying demand. The gap between income and housing prices has widened. According to the Housing Finance Research Institute, Seoul's housing purchase burden index was 182 in the third quarter of last year. A higher index means greater burden; 182 indicates that 45.5% of income must be spent monthly on loan principal and interest repayments. According to the Korea Real Estate Board, the average price of Seoul apartments was 1,151.46 million KRW as of December last year. Compared to 827.22 million KRW in December 2019, before the recent price surge, this is an increase of 324.24 million KRW over two years, and more than double the 570.28 million KRW in May 2017 when the current administration began.

Adding to this, the rise in interest rates and tightening of loan regulations are expected to further reduce demand. Since last month, financial authorities have strengthened the Debt Service Ratio (DSR) regulation to 40% for total loans exceeding 200 million KRW. Under this regulation, a person earning 50 million KRW annually buying a 600 million KRW apartment in a regulated area could previously borrow up to 240 million KRW, but from this year, only up to 150 million KRW is allowed. Furthermore, from July this year, the DSR regulation will apply to total loans exceeding 100 million KRW. The base interest rate has also risen three times by 0.25 percentage points each since August last year, reaching 1.25% last month, with further increases possible this year. CEO Song predicted, "If loan regulations tighten and interest rates continue to rise, the associated increase in loan interest burdens will reduce the buying proportion of the younger generation, who have driven housing price increases."

"Demand Remains, If Policies Materialize..." Upward Potential Still Exists

Extremely low transaction volumes are difficult to use as a basis for normal judgments about long-term trends. This means it is hard to view the recent stabilization and decline in apartment prices as a firm downward trend driven by market principles. The 'major uptrend theory' is based on the idea that market participants are withholding judgment ahead of the major event of the presidential election, causing the market to exhibit a 'temporary correction' pattern. Since demand still exists in the market, if policies easing loan regulations or tax burdens are finalized after the election, housing prices are expected to stir again.

Yoon Jihae, chief researcher at Real Estate R114, said, "There is no urgent need to sell or buy." She added, "The current transaction slump is due to a large gap between the prices sellers want and buyers are willing to pay. Buyers are fundamentally blocked from purchasing due to loan limits, and sellers, anticipating tax relief issues linked to the election, see no reason to lower prices."

In fact, the volume of listings, considered one of the early signs of price declines, has not increased significantly. According to real estate big data company Apartment Real Transaction, current apartment listings in Seoul are around 46,000 to 47,000 units. Compared to November last year, before the price correction phase, this is an increase of about 2,000 units. In other words, there are not many people willing to sell their homes now. Proponents of the major uptrend theory emphasize that housing price trends could change depending on the post-election situation. Both ruling and opposition presidential candidates have pledged to reduce taxes for homeowners and ease loan regulations for actual buyers. In particular, they have promised to relax the Loan-to-Value (LTV) ratio to 80-90% for first-time homebuyers or young couples and newlyweds. If these pledges materialize, actual buyers who gave up purchasing due to loan constraints could re-enter the market.

The influx of households that have exhausted their right to renew rental contracts starting in July is another variable that could change housing price trends. The current government introduced a new lease law in July 2020 to stabilize tenants' housing by allowing contract extensions for two years and limiting rent increases to no more than 5% upon renewal. As a result, tenants who used their renewal rights gained housing stability, but new rental prices rose sharply, forcing new tenants to pay higher rents. In July, households whose renewal rights expire will enter the market. These households must either pay the already increased rent again or choose to buy a home. Kim Deokrye, head of housing policy at the Korea Housing Industry Research Institute, said, "The smaller the gap between rental and sale prices, the more likely households with expired renewal rights will choose to buy their own homes."

There is also an argument that even if average housing prices fall, "some places will still rise." As the real estate market continues to underperform compared to the past, the preference for a 'smart single home'?one with good living conditions and price resilience?grows stronger. Ko Jongwan, president of the Korea Asset Management Research Institute, said, "As housing prices enter a correction phase, demand concentrates on apartments in growth areas and prime locations, potentially intensifying price polarization with these complexes seeing price increases."

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