Korean housing market shows signs of thawing, still risks remain

Economy

Published: 20 Jun. 2023, 17:13 Updated: 20 Jun. 2023, 19:06

Korean housing market shows signs of thawing, still risks remain

People walk the streets of Myeong-dong in central Seoul on March 28. [YONHAP]

Financial authorities warn that risks remain in the property market despite some signs of recovery.

Households are taking on more debt, and much of that money is being used for home purchases, while the end of remote working has increased demand for commercial buildings in certain regions.

Korea's household debt rose for two consecutive months through May, as the central bank halted rate increases and the government relaxed regulations.

Household loans from banks in May jumped at the fastest pace in 19 months, led by housing loans, according to the Bank of Korea data on June 9. The total balance for household loans stood at 1,056.4 trillion won ($825.31 billion), up 4.2 trillion won from a month earlier.

The number of housing transactions in Seoul was more than 3,100 in May after staying below a thousand for six consecutive months through December last year, according to the Seoul city government.

The number of people who bought their first home in the January-March period rose 10.5 percent from a quarter earlier, data from the Supreme Court of Korea show.

"A belief that the policy rate has reached its peak and an expectation for a potential rate cut this year seem to have increased household loans used for mortgages," said Park Jeong-young, a PR manager at KB Kookmin Bank.

The Bank of Korea kept the policy rate unchanged in the last three meetings, while the Federal Reserve paused in June after increasing at every meeting over 15 months.

Apartment prices are up in certain districts, mostly in southern Seoul.

The apartment purchase price index for Songpa District, southern Seoul, rose for six consecutive weeks through last week, according to the KB Land data. The index for Gangnam inched up over the last three weeks.

"Transaction volumes over the past months centered on the units that needed to be sold urgently," said a real estate agent in Gangdong District, southern Seoul. "Those units have been sold out, and the prices are recovering."

Eased regulations have helped housing market sentiment.

Finance Minister Choo Kyung-ho said on June 13 the government is reviewing a partial relaxation of the debt service ratio (DSR) for landlords that need to return jeonse, or lump-sum deposits.

DSR is loan payments divided by the borrower's income. The government's remarks followed a series of jeonse scams by owners of villas, housing that is more affordable than apartments in Korea.

In January, the government removed Seoul and nearby areas from the list of closely watched speculative districts, except for four districts. Gangnam and Songpa in southern Seoul are two of the four.

"Sluggishness in the property market is recently showing signs of easing," Bank of Korea Gov. Rhee Chang-yong said in an address on June 12.

"But risks in the financial market, like the rise in the delinquency rate for property loans, need to be noted," Rhee said, while also mentioning the need to deleverage households in the mid-to-long term.

The Bank of Korea warned housing prices are still too high.

"Housing continues to be overvalued," the central bank said in a report published June 8. "Household loans related to housing are increasing again."

Commercial buildings also present risks, though the situation may not be as severe as in the United States. This category includes offices and warehouses.

The central bank warned of default on loans from non-bank financial companies, which often finance commercial properties.

The balance for project finance loans by non-bank financials totaled 253.6 trillion won as of the end of the fourth quarter, according to data from the Bank of Korea.

The delinquency rate for the loans rose to 1.03 percent from 0.77 percent a quarter earlier.

"The situation in the United States is very different from Korea, as money for commercial buildings was largely lent by small and mid-sized banks," said Sohn Eun-kyung, a senior researcher at KB Research, a division at KB Financial Group. "The crisis at the banks is causing an aftermath in commercial buildings."

Apartments in Songpa District, southern Seoul, seen from Lotte World Tower on June 11. [NEWS1]

Loans for commercial real estate were 67.2 percent of all loans by small U.S. banks as of March, according to a report from Axios, citing the Federal Reserve.

Small banks refer to those not in the top 25 by assets.

Sohn further noted the mass layoffs in the United States and an increasing number of people working from home, which reduces the need for commercial properties.

A wide range of businesses, including many tech related, have laid off thousands of workers. Walmart, 3M, Tyson Foods, Deloitte and Whole Foods are just a few of the companies that have disclosed personnel cuts.

"In Korea, work from home isn't as active to the point that is pulling down the rent demand for commercial buildings. Also, the supply of office buildings isn't big, so the chance of a price plummet is not large," Sohn added.

Large companies, including LG U+, SK Telecom and Kakao, asked their employees to return to the office in the first half of this year. The trend brought down the number of remote workers to 960,000 last year from 1.14 million a year earlier.

The vacancy rate for commercial buildings in Korea fell to 9.5 percent in the first quarter from 10.4 percent a quarter earlier, according to the Korea Real Estate Board. The rent index for commercial buildings rose to 101.08 points from 100.07 in the same period.

"A lot of commercial property is purchased with debt, and they are raising rents to pay the interest," a real estate broker in Seoul said.

BY JIN MIN-JI [jin.minji@joongang.co.kr]