CEIC Database Expansion: Nascent revival in South Korea housing market might falter

CEIC News@lert: Global Database - October 26, 2015 CEIC is pleased to announce the expansion of the South Korea Global Database with a comprehensive set of property indicators that provide more information about the housing market. Recent movements in these indicators suggest the South Korea housing market is showing signs of recovery after a downturn during late 2011 to mid-2013. OVERVIEW The Korean housing market is characterized by the use of Jeonse, a type of real estate rental contract which is unique in South Korea. Under Jeonse contract, the tenant pays a lump sum deposit to the landlord at the start of the lease period, equivalent to a significant proportion of the property value (approximately 50-80%) in lieu of monthly rent. This lump sum payment is typically refundable at the end of the lease period and the landlord may invest these deposits to earn a return. From the tenant’s perspective, Jeonse provides an affordable means of acquiring accommodation. From the landlord’s perspective, it is a good source of obtaining a large sum of liquid capital. There has been high demand for Jeonse in recent years, which not only raises Jeonse price, but is also pushing the housing purchase price upwards. Since its downturn in 2012, the South Korean housing market has continued to recover. The upward price trend has lasted for 25 consecutive months in terms of the Korea Housing Price Index (KHPI) and 37 months for the KHPI: Jeonse. As Jeonse comprises a deposit equivalent to a proportion of the house value, these indices are highly correlated. On the flip side, higher Jeonse sales-to-price ratio may likewise induce housing purchase, given the high liquidity commitment of the Jeonse arrangements. JEONSE-MONTHLY RENT CONVERSION RATIO The Jeonse-Monthly Rent Conversion Ratio is a unique indicator in the South Korean housing market. This ratio is comparable to an annualized rental interest rate, and can be used as the required rental return for the landlord, or a benchmark opportunity cost for tenants when choosing Monthly Rent over Jeonse. The lower conversion ratio suggests two potential trends. One is that demand for Jeonse may well diminish as tenants seek cheaper alternatives, be it through housing purchases or monthly rentals. Another is that, as housing supply increases, the sustainability of the Jeonse may be called into question as the mismatch between the Jeonse and market rent sparks concerns of an asset bubble. Indeed, as Jeonse becomes increasingly more expensive, housing demand has started to pick up for home buyers. This is further enforced by a host of other factors, including the interest rate environment. Lending rates in South Korea are falling as the Bank of Korea, the central bank, continuously lowers its policy interest rate. The financial cost of borrowing is therefore reduced, especially for households applying for housing loans. Newly Extended Commercial & Specialized Bank Loans to Households for housing fetched an interest rate of 2.94% per annum as of August 2015, furthering a downward trend which began around early 2012. This falling interest rate environment is supportive of housing demand. Indeed, the Housing Demand Index shows rising sentiments in housing purchases, especially since early 2015. The Housing Demand Index represents the demand trend in the market, whereby the index is greater than 100 if demand surpasses supply. This does not necessarily spell the end for Jeonse. The associated Housing Demand Index for Jeonse contracts has been hovering around the 110 level since April 2013. This is attributed to a comprehensive package of property stimulus measures introduced then. This so-called “April 1st Properties Measures” package included the relaxation of lending criteria, tax benefits and a reduction of government-led housing supply. The April 1st Properties Measures certainly helped in halting further declines in demand, increasing transaction volume. Thanks to higher demand of Jeonse, the market is more active today. The sales transactions trend is catching up with that of Jeonse transactions. However, the Housing Transaction Index is still below 100. It may be inferred that the market is not quite in a boom despite the apparent recovery. In fact, there are potential threats that may obstruct continuous housing market growth in Korea. DOWNWARD PRESSURES AHEAD Housing Unit Construction Permitted has declined significantly since 2013 as a result of the April 1st Properties Measures on housing supply control. Meanwhile, the spike in the Housing Unit Begin Construction indicator in June 2015 suggests greater housing supply in the forthcoming period. This abnormal growth surge measured 163.7% Y-o-Y in June 2015. Due to stagnant population growth, the risk of a future downturn in the housing market persists in the long term, notwithstanding potential excess supply. In addition, the incessant rise in household debt is a growing concern. Since a large proportion of household debt is related to housing loans, upward adjustment in the lending rate might create a hefty burden on borrowers in the future. By Eunjee Kim - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
26th October 2015 CEIC Database Expansion: Nascent revival in South Korea housing market might falter

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