March 19, 2015 / 9:01 PM / 5 years ago

South Korea's housing market booms - except for prices

SEOUL, March 20 (Reuters) - Ryoo Joong-il joined a million others in South Korea who bought homes over the past year as record-low interest rates and market-boosting measures helped pull the housing market out of a years-long slump.

“I didn’t have a plan for a long time but recently made a decision as I now think prices will increase further with all the policy measures,” said Ryoo, 44, as he left a sales office after signing a contract on an apartment in eastern Seoul.

While activity is soaring, with the number of transactions at a 7-year high, prices are rising at a glacial pace as heavy household debt and a fast-ageing population keep a lid on price growth.

Eighteen straight months of growth have added a gain of just 3 percent, or less than 2 percent after inflation, even though the last time the market was this busy, in early 2007, prices were growing at annual rates of 11 to 12 percent.

Demographic factors may be behind the low price growth. South Korea’s population of 50 million is ageing at the fastest pace among major economies, with a plunging birth rate in recent decades and low immigration.

The population aged 30 to 49 - the main group of potential home buyers - has been falling since 2006, a demographic brake on home buying, suggesting the current expansion is based on housing need rather than speculative froth with few indications of a sudden pick-up in prices.

“The prospects two to three years from now look still unfavourable mainly due to the effects of the fast-ageing population, which means there will be fewer and fewer buyers,” said Song In-ho, research fellow at the government-run Korea Development Institute.

The government eased mortgage borrowing restrictions and the central bank has cut interest rates by a total of three-quarters of a percentage point to a record-low 1.75 percent since mid-2014 to lift consumer demand.


A sharp rise in the cost of jeonse, or rental deposits, amid falling interest rates has also prompted tenants to consider buying homes instead of renewing rental contracts at higher deposits. In some cities jeonse have risen to near or level with the purchase price of the home being rented.

Under South Korea’s unique jeonse system, tenants pay a large deposit to rent a home for a basic period of two years. The landlord must return the whole deposit, usually more than half the home’s value, at the end of the contract and does not charge a monthly rent.

Mortgage loans owed by households jumped 10.5 percent by the end of January from a year earlier, the fastest growth since compiling of data began at the end of 2008, and the seventh straight month of accelerating growth.

The growth in mortgages occurred against a backdrop of heavy household debt, with the average South Korean household owing 161 percent of annual disposable income in 2013, up from 123 percent a decade earlier and higher than the 140 percent reached in the United States before the 2008 subprime mortgage crisis.

That debt burden has not been helped by income growth lagging economic growth for many years as manufacturers focused their expansion abroad to cut labour costs, while service industries have failed to create enough well-paid local jobs.

In addition, the recent pick-up in consumer debt from an already high level means South Koreans are likely to grow more cautious when it comes to borrowing to buy homes, while the government will be reluctant to introduce further stimulus.

“It’s safe to say that the official concern with the property market overheating will inhibit a housing-led recovery in domestic spending,” said ING economist Tim Condon in Singapore.

Additional reporting by Sohee Kim; Editing by Tony Munroe and Eric Meijer

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