Chuan Shi Fang has caused many disputes, and Chinese businessmen have personally experienced the housing price storm in South Korea: a deposit of 1 million yuan has not been refunded to tenants | South Korea | housing prices
In the past few years, South Korean housing prices have experienced a sharp rise, with prices in many cities including Seoul experiencing significant increases. But starting from the second half of 2022, the high housing prices in South Korea have turned downwards, with significant declines in both prices and transaction volume.
Over a period of more than ten months, the South Korean central bank raised interest rates by 300 basis points, which is considered by the market to be an important factor in the decline in housing prices in the country. The rise in interest rates has had a chain reaction, amplifying the financial risks of the special traditional housing system, and the landlord's selling behavior has accelerated the decline in housing prices. The daughter of a interviewed Chinese businessman encountered a situation where Chuanshi Fang was unable to refund the deposit. He said, "Currently, Chuanshi Fang has caused many disputes and has become a major problem in Korean society."
After a sharp rise, there is now a sharp decline
"Koreans, like Chinese people, are greatly influenced by traditional thinking and enjoy buying houses." Song Guoping, who was born in South Korea in 1959 and is currently the president of the Chinese Chamber of Commerce in South Korea, told China News Service that there are many similarities between China and South Korea, and there are also similarities in the real estate market.
According to Song Guoping's observation, the current significant drop in prices is related to the excessive rise in housing prices in previous years. During the epidemic, the South Korean government implemented some stimulus policies to cope with the negative impact of the epidemic on the economy, which led to a large influx of funds into the real estate market. From 2019 to 2022, housing prices in Seoul increased by at least 2 to 3 times, and even higher in the core area.
During the epidemic, the Bank of Korea, the Bank of Korea, has significantly lowered its benchmark interest rate multiple times and lowered it to 0.5% in May 2020, setting a new historical low. This low benchmark interest rate has been maintained for 15 months. Wang Xiude, Permanent Vice President of the Chinese Chamber of Commerce in South Korea, told China News Service, "At that time, the interest rate was less than 1%, which was equivalent to the government sending money to the people. When various industries were relatively depressed, people not only bought stocks but also went to buy houses, leading to a large influx of people into the housing market." He said that at that time, the prices of houses across South Korea were increasing, with an average increase of more than twice, and the increase in Seoul was more than twice.
According to the real estate market statistics released by KB National Bank in South Korea, the average transaction price of Seoul apartments exceeded 1 billion Korean won in September 2020, and exceeded 1.1 billion Korean won in April 2021. The average transaction price in October 2021 was 1.21639 billion Korean won. That is to say, the average transaction price of Seoul apartments has risen by over 200 million Korean won in 13 months, a 21% increase.
With the skyrocketing housing prices in Seoul, the demand for housing among the public is gradually shifting to the capital area. According to data from KB National Bank in South Korea, the average transaction price of apartments in Gyeonggi do was 591.1 million won in October 2021, and Incheon City also rose to 424.71 million won.
The continuous rise in housing prices makes it difficult to maintain ultra-low benchmark interest rates. As early as January 2021, Li Zhulie, then Governor of the Bank of Korea, stated that a large amount of funds had recently flooded into the asset market and household debt had significantly increased. It was necessary to timely and orderly turn loose policies back to normal in 2021. In August 2021, the "boots" landed, and the Bank of Korea raised its benchmark interest rate from 0.5% to 0.75%. Afterwards, the Bank of Korea raised interest rates rapidly, raising the benchmark interest rate to 3.5% by January 2023, with a cumulative increase of 300 basis points, which has been maintained to this day.
Wang Xiude said, "In the past, loan interest rates could be ignored, but now mortgage interest rates have risen to 7%, 8%, or even higher. Many homebuyers cannot even pay bank interest, and housing prices have rapidly decreased."
According to data from the South Korean Real Estate Commission, the country's housing price index fell by 0.47% in April 2023 compared to March, marking the 11th consecutive month of decline and the longest period of housing price decline in 11 years. Wang Xiude said, "In 2023, the average housing prices in South Korea have decreased by nearly 40%, with big cities such as Seoul experiencing a decrease of about 30% and small cities experiencing a decrease of 50%. It is said that there are also some places experiencing a decrease of 60%." Despite the decline in housing prices, Song Guoping and Wang Xiude both stated that currently, housing prices in South Korea are still higher than before the pandemic.
The transmission of the imperial chamber has fueled the tide
The real estate market in South Korea has a special system, which is considered one of the reasons for the sharp rise and fall of housing prices in the country by the outside world. This is the Chuanshi housing system, also known as the full rental housing or standard rental housing system.
Chuanshi Fang is a choice between monthly rent and ownership. At the beginning of the Chuanshi House lease, tenants are required to pay a single deposit of 50% -80% of the current market value of the property, and no other rent needs to be paid throughout the entire lease period. The landlord is required to refund all deposits after the contract expires. The interest income from the deposit during the lease period is not related to the tenant and belongs to the landlord.
Guotai Junan stated in a research report that during periods of low interest rates, on the one hand, tenants can use bank loans to move into homes of the same level at a cost lower than regular rent; On the other hand, landlords can invest the large deposit they receive in the capital market, or purchase new properties and continue to rent them out as inheritance properties. In this way, tenants save expenses, landlords increase personal assets, and even with lower interest rates, the banking industry earns substantial interest margin income through its large business scale. This three win situation has driven the prices of Chuanshi houses to rise significantly in the past few years.
Wang Xiude claimed that Chuan Shi Fang has existed in South Korea for a long time. Due to the low interest rates of bank loans in the past few years, tenants have paid lower monthly interest than rent. Therefore, many tenants choose to apply for a loan and pay the rental deposit to the landlord. In this way, they only need to pay a small amount of interest each month to live in a better and larger house. The landlord received this money, bought a house again, and then rented it out, constantly snowballing, which encouraged the wealthy to speculate in real estate. He observed that in the rental market in South Korea, the proportion of choosing the traditional Chinese style housing has always been high, and the main choices for monthly rent are lower quality housing and single room housing.
But the flaw of this system is that if the bank loan interest rate is raised and the tenant pays interest higher than the rent, the tenant will choose to terminate the lease on a large scale, but the landlord cannot return the deposit in the short term. The Bank of Korea has raised interest rates significantly since August 2021, causing the collapse of the housing system.
Wang Xiude said, "Currently, the transmission of artifacts has caused many disputes and become a major problem in Korean society." Yonhap News Agency reported in May that fraud cases involving the transmission of artifacts have occurred in many parts of South Korea, with Incheon's "Construction King A" case having the largest scale, involving a total amount of 38.8 billion Korean won. As many as 481 tenants have been affected, of which 3 have already committed suicide.
Guotai Jun'an stated that while demand for ancestral houses has declined, some landlords have had to sell their properties to repay tenants' deposits, which has led to an accelerated decline in housing prices in South Korea. At the same time, a considerable number of landlords are still unable to repay the tenant's deposit. Therefore, a phenomenon has emerged in South Korea where, despite a significant drop in housing prices, even if new tenants are willing to take over the property, it is difficult to recover the full deposit received from the tenants. In order to retain the original tenants and avoid a break in the funding chain, landlords have even started to offer rent back to them.
Wang Xiude said, "My daughter encountered this situation when renting a house outside. When she withdrew her lease last year, the landlord only refunded a portion of the deposit, and there was still about 1 million yuan that had not been refunded. This landlord built their own house and specializes in renting out traditional Chinese style houses. Their strength is relatively high. After negotiation, the landlord will continue to bear the loan interest on the unreturned deposit. It's good to do so now, as many landlords are no longer able to return the deposit." Song Guoping said that after the problem with traditional Chinese style houses, more and more tenants have chosen ordinary rental methods.
Where will housing prices go?
At present, South Korea is facing problems such as high household debt and a low birth rate, which some analysts believe have become unfavorable factors dragging down the future trend of housing prices in the country.
A report released by the International Finance Association in June 2022 showed that in the first quarter of 2022, South Korea's household debt to GDP ratio reached 104.3%, ranking first among the 36 countries and regions surveyed. Among East Asian countries and regions, Hong Kong, China, Chinese Mainland and Japan accounted for 95.3%, 62.1% and 59.7% respectively.
The South Korean Ministry of Planning and Finance recently announced that the OECD has lowered South Korea's economic growth forecast for 2023 from 1.6% to 1.5%, and next year's economic growth forecast from 2.3% to 2.1%.
Guotai Junan analysis: "Although the Federal Reserve and other central banks have expressed that the first round of banking crisis caused by high interest rates has passed, South Korea has conveyed a signal through examples: the 'Pandora's Box' of interest rate hikes has not closed, and the pressure of asset prices and leverage will still make many investors unable to sleep at night."
The South Korean government has introduced policies to stabilize the real estate market. According to Yonhap News Agency, South Korea's Deputy Prime Minister and Minister of Planning and Finance, Yoshiaki Yoshiaki, stated in March this year that the benchmark housing prices for shared residences such as apartments and consortium residences in the country have decreased by 18.6% year-on-year, the largest decrease since the implementation of the relevant system in 2005. He stated that the decline in benchmark housing prices is attributed to the government's policy of stabilizing the real estate market and the central bank's interest rate hikes. The benchmark for collecting comprehensive property tax on housing prices has been raised from 600 million Korean won to 900 million Korean won, and the reduction in tax rates will also play a stabilizing role in the real estate market.
