It will soon be that dreaded time again for me – the renegotiation of my apartment lease. Thankfully, it happens just once every two years, but it is a real pain. The silver lining to this biannual cloud is that it forces me to look more closely at the Korean housing market, an important factor in most economic considerations.
At first brush, Korean real estate is as loopy as any foreigner may surmise about anything in the Korean economy.
First of all, there is a glut of slow-moving, unoccupied apartments – and yet prices remain artificially high. This is partially due to the universal axiom that real estate prices rise much faster than they fall. People naturally welcome seeing investment values inflate and resist recognizing shrinking values.
Second, housing costs are kept high, in spite of the vast supply of housing, due to a practice called jeonse, the non-interest-bearing, fully refundable deposit paid to the landlord in lieu of rent. Conventional rental properties can also be found, but most Korean tenants prefer jeonse as part of their strategy to eventually save enough money to buy.
During times of higher interest rates, jeonse was roughly 50 percent of the market value of the property. The landlord would then use the deposit for investment, or at least put the money in the bank, and enjoy the return. But thanks to very low interest rates, traditional jeonse levels have become increasingly unpopular among landlords. As a result, there have been two important developments.
The first development has been the rise in jeonse significantly above normal levels. In some extreme cases, deposits approach actual market values of properties. One can also now find combinations of jeonse plus monthly rental payments. These schemes compete in the market, keeping housing costs high, despite the glut of unoccupied apartments.
The second development has been government intervention. President Park Geun-hye has championed herself a protector of the lower and middle classes. During the past months, her administration has launched programs to help the struggling, first-time home buyer. The thinking has been to find ways to make it easier for first-time buyers to purchase the glut of unsold apartments through low-interest fixed-rate home mortgages and a decrease in real estate acquisition taxes.
At first glance, all of these initiatives seem like overdue relief for the weakened middle class. But are they really? These programs do nothing about the ridiculously high, yet stagnant, real estate prices and their corresponding high jeonse and rental rates. A cynic may suggest that, so far, the conservative government has only looked after the welfare of construction companies by making it easier for them to offload inventory at premium prices. In other words, the government’s policies are simply prolonging the real estate supply priced above natural buyer demand. In fact, some Korean economists have warned against investing in properties at prices artificially maintained by government mortgage programs. Rather, the mortgage rates should follow the prices – not the reverse.
So, given this situation, what should be done?
First, all artificial mechanisms that maintain current pricing should be removed – perhaps gradually, but at least steadily. The Korean construction industry has already become globalized, realizing that it cannot sustain its growth within the domestic market. As it has globalized, competing with other international construction companies, Korean companies’ quality of operations and deliverables have remarkably improved. Meanwhile, domestic-only construction companies have struggled to survive, often lacking the means to upgrade their construction processes. In other words, the Korea-only construction companies have found themselves in the same niche as the buggy whip manufacturers did a century ago. Accordingly, one way or another, they need to die or transform themselves into other businesses.
Second, the Bank of Korea needs to set the Korean prime rate at a higher rate to return the market to more normal conditions, at a rate worthwhile for landlords to accept jeonse at more reasonable, smaller amounts. In so doing, cash-strapped jeonse tenants would then have more money to spend or possibly bank – both of which would be economic positives.
Third, the Korean government should signal that the era of high real estate speculation is over. Government policies, including taxation, need to reflect this reality. Since so much of the government supporters’ wealth is held in speculative real estate, this may be unrealistic. But this mindset remains a requirement for strengthening the long-term economy.
But, even if the above suggestions were implemented, there would not be an immediate effect. Like artificially high real estate prices, speculators would be slow to allow their investments sink to natural supply-and-demand levels. To stimulate such movement, taxation penalties for unoccupied properties held beyond a certain time period may be needed. Such measures would be unpopular among government supporters and, thereby, may be unrealistic.
If the government wants to talk populist, it should act populist – particularly when it comes to housing. Otherwise, the electorate will discover that it has been “had” by the elite yet once again.
- Korean Real Estate Acquisition Taxes for Purchase of Real Estate in Korea
- Inside Korea’s Two-Tiered Economy by Tom Coyner
- Retail Business in Korea by Tom Coyner
- Small Business Compliance in Korea: No Not Only for the Big Boys
- European Union Chamber of Commerce No Longer Doing Business in Korea by Tom Coyner
- Proposed Amendment to Real Estate Development Business Act of Korea: Rating of Real Estate Development Projects