South Korea house price crash: Property declines prove a challenge to world’s most-indebted consumers
House prices in South Korea saw the slowest pace of growth since 2008 in September, as the property market has come under pressure from a record jump in interest rates and the highest level of household debt in the world.
What impact will the South Korea housing market crash have on the nation’s economy? And what is the potential outlook for the market in the future?
In this article, we look at some of the latest analyst prospects for South Korean real estate prices.
Housing crash explained
What is a house crash? Property prices tend to rise and fall in cycles, with peaks or bubbles – when average house prices exceed their fundamental value – ending in a cooling of the market. When prices reach their peak, they can sometimes crash rapidly.
Housing bubbles can occur when demand from buyers rises, often for cultural reasons or encouraged by excessive lending. When economic conditions change and property owners can no longer afford to pay their mortgages they can be forced to sell, increasing property supply and causing prices to collapse.
The last South Korea house price crash occurred during the 2008 global financial crisis – which was sparked by the US housing market crash – with housing prices plunging by almost 40% from their highs.
What is driving the current South Korea house price crash?
According to analysis by German asset management firm DWS:
Prices have soared for the past five years, doubling in Seoul and making South Korea housing one of the most unaffordable property markets in the world. The market began to show signs of running out of steam in the first quarter of this year, when the Korea Real Estate Board’s nationwide sales price index stabilised at 104.8. It held at that level until July, then dropped to 104.50 in August and 103.90 in September.
![South Korea’s Nationwide House Sales Price Index]](https://img.capital.com/imgs/articles/750xx/South-Korea-house-price-crash-MCT-7557-EN.png "South Korea’s Nationwide House Sales Price Index]")
The state of the South Korea real estate market was one of the main issues concerning voters in the nation’s March election, which saw Yoon Suk-yeol defeat incumbent Moon Jae-in, whose policies to reign in the housing market were seen to have failed.
Property markets around the world have been hit by a sudden change in pace as rapid interest rate hikes by various central banks have pushed up mortgage rates.
The Bank of Korea began raising interest rates in August 2001, earlier than most central banks that started their tightening cycles this year. The central bank hiked its benchmark base rate in 25 basis point increments from 0.75% to 2.5%, then opted for a 50-point hike to 3% on 12 October.
The record pace of interest rate rises over the past year has put pressure on South Korea’s consumers, which has a household debt to gross domestic product (GDP) ratio of 104.3%.
Bank of Korea data showed that mortgage loans increased by 8.7trn South Korean won (KRW) during the second quarter, as the rise in interest rates increased households’ debt burden. From August, household loan regulations were eased, focusing on providing support for first-time home buyers. But with 75% of the country’s household wealth linked to property, higher mortgage costs could cause a financial crisis.
“In a situation where the level of private debt is high, the sharp rise in inflation and the pressure to raise interest rates will not only put a burden on borrowers' ability to repay their debts, but also increase volatility in the financial market,” central bank Vice Governor Lee Jong-ryeol said in a September briefing.
Lee said the bank expects housing prices to decline by less than 5-6% on an annual basis, and noted that in certain locations with low housing availability, markets remain attractive for buyers.
Investment in construction accounts for around 15% of the South Korean economy, so a fall in South Korea real estate sales could weigh on GDP growth.
What do analysts expect for the South Korean real estate market after the recent heavy slowdown? Will there be an extended South Korea house price crash?
South Korea property market outlook
Analysts at ratings agency Fitch said in September they expect South Korea’s housing prices to decline:
DWS is bearish on the outlook for the market for the remainder of 2022, stating that “since the start of 2022, Korea's housing market has shown clear signs of entering a downturn and is highly likely to stay in the doldrums for a while amid steeply rising interest rates and a bleak outlook for an economic recovery”.
Analysts added: “Even though the impact is not yet reflected in the statistics, the recent second-hand condo transaction price in Seoul is estimated to drop by 10-15% from its previous peaks in 2021. As the country’s central bank has signalled additional rate hikes in the remainder of 2022, the housing market sentiment may end up worsening further this year.”
At the time of writing (28 October), Trading Economics expected the South Korea house price crash to intensify in 2023. The data provider forecast that the Kookmin Bank housing index could decline to 100.50 by the end of the quarter from 100.60 in September, and drop further to 96 in 2023, before rebounding to 110 in 2024.
Ultimately, whether the slowdown in South Korea’s house price growth turns into a full market crash will likely depend on how high the central bank raises interest rates and the impact that has on mortgage rates.
Analysts at Japanese bank Mizuho expect two more 25 basis point rate hikes from the Bank of Korea in 2022 before contemplating a pause in 2023. They said: “A hawkish Fed will drag BoK’s rate above 3.0%.”
While lower prices would make properties more affordable for buyers, high inflation and interest rates could reduce mortgage affordability and could increase mortgage loan defaults.
The bottom line
Remember that analysts’ forecasts on the South Korean real estate market can be inaccurate. You should always conduct your own research before trading, looking at the latest market trends, news, technical and fundamental analysis, and a wide range ща expert opinion before making any investment decision.
Bear in mind that past performance does not guarantee future returns. And never trade with more money that you cannot afford to lose.
FAQs
Are South Korean house prices dropping?
South Korean house prices have been rising, according to data from the Korea Real Estate Board, but the pace of growth has fallen sharply since July.
Why are housing prices so high in South Korea?
Government policies on property taxes, restrictions on lending and insufficient new housing construction in the past have driven up prices as demand outpaces supply.
Can I buy a house in South Korea as a foreigner?
Unlike most other Asian countries that limit foreign ownership, foreigners can buy residential and commercial property in South Korea without restrictions.
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