[Insight & Opinion] The Chaotic Housing Market Demands Patience

Where is the housing market headed this year? Since the second half of last year, the wave of interest rate hikes has begun to have an unprecedented impact on the real estate market, extending beyond virtual assets, stocks, and bonds. As a result, the Korean housing market recorded a 6.5% decline nationwide last year. Seoul also gave back all the gains from 2021 due to last year's decline, meaning that those who purchased homes in Seoul in 2021 have all entered a zone of unrealized losses. Considering that household credit, including mortgage loans, showed the highest-ever increase, this is a period where households are experiencing increased pain due to higher interest burdens and apartment prices falling below principal amounts. This year is expected to be one in which these trends intensify further.

The market turned bearish due to interest rates, just as the strong surge in 2020?2021 was driven by them. It is anticipated that the pace of additional interest rate hikes this year will be slower than last year, but the level remains high. Since this high-interest environment continues, many expect the market to maintain its weakness, with the reversal of Jeonse (long-term lease) prices expected to deepen. This is because the decline in the Jeonse market is steeper than in the sales market.

To understand the reversal of Jeonse, one must first look at the Jeonse crisis. The period from August 2020, when the Lease Protection Act was revised, through December 2021, when zero interest rate liquidity expanded due to COVID-19, was the Jeonse crisis period. Afterward, steep interest rate hikes and Jeonse price declines appeared. Therefore, the period from August 2022 to December 2023, which corresponds to the second year after the Jeonse crisis, is expected to be the reversal Jeonse period. Conflicts between landlords and tenants are expected to intensify this year, and debates over the Jeonse system itself are likely to grow. Especially now, as Jeonse prices are falling due to high interest rates, a comprehensive reversal of Jeonse is expected, creating a very tough environment to navigate.

In this market environment, the government's role has become important. Until the first half of last year, the government shared the view that housing prices were overvalued, but as the decline accelerated in the second half, it shifted to stimulus measures. The turning point in government policy came on December 21. Finding that stimulus measures focused on actual buyers were insufficient to revive the market, policies were announced to mobilize investment demand from multi-homeowners as well.

However, if incentives to attract investment demand from multi-homeowners are excessively expanded, controversy is inevitable. The government addressed this by defining those owning three or more homes as actual multi-homeowners and designing the system to maintain regulatory burdens such as acquisition tax, property tax, and capital gains tax. Additionally, the government revived the housing rental business registration system, structuring it so that only those incorporated into this system would see reduced regulatory burdens even if owning three or more homes. Regardless of the appropriateness of this structure, there are shortcomings in the policy. Since some systems disappeared after July 2020, it is difficult to guarantee policy continuity, and there are various controversies regarding the effectiveness of the system. Ultimately, the impact of these measures will only be confirmed after the National Assembly discusses the housing rental business system in February.

Nevertheless, the government is expected to continue announcing stimulus measures. If the market stagnates, stimulus measures comparable to those responding to the September 2014 policy?which was practically a declaration to halt housing supply?may be introduced. Ultimately, while interest rate stabilization is a necessary condition, the level of stimulus measures will be the key factor determining the market trend this year.

In fact, changes in asset prices themselves have no direct relation to the economy. Only sentiment and unrealized gains or losses change, and these unrealized gains or losses have no economic substance. On the other hand, a decline in real estate prices that contracts the construction industry does affect the economy. The worst-case scenario involves unsold units accumulating, developers going bankrupt, construction companies facing increased risks of guaranteed completion leading to blocked financing, and ultimately banks being affected.

Therefore, government intervention is indispensable. However, since policies affect the market with a time lag, patience is required. If massive stimulus measures are unleashed because immediate results are not visible, significant costs may be incurred later to manage the aftershocks following normalization. This year, we hope to see excellent helmsmen leading real estate policy.

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