Source: Zhongxin Jingwei 

Author: Zhou Chao 

Recently, the sharp drop in housing prices in South Korea has attracted attention. According to news, housing prices in some areas of Seoul have fallen by 40%, and trading volume has plummeted by 70%, with banks cutting off supply to millions of people. According to the Asia Daily, the published prices of apartments, multifamily residential properties, and other common residential properties in South Korea in 2023 decreased by an average of 18.63% compared to 2022, setting a new historical high 
What are the reasons for the current situation of the Korean real estate market? 

The fundamental reason for the sharp decline in housing prices in South Korea, especially in Seoul, is the overall population trend in South Korea. The comprehensive fertility rate in South Korea has long been below 1. In terms of the newborn population, the annual birth rate in South Korea has dropped below 600000 by the millennium, and only 249000 people were born in 2022, which does not rule out the possibility of further decline. Therefore, the lack of sufficient population support is the fundamental reason for the decline in housing prices in South Korea.

As for the direct reason, as loans are the main way for Koreans to purchase a house, the supply of M2 currency and the level of interest rates are crucial. The global interest rate hike initiated by the United States has forced a group of allies to follow suit and the supply of M2 has rapidly been limited.

Data shows that since November 2022, the total amount of M2 currency in South Korea has stagnated, which directly stimulated the continuous decline in housing prices in Seoul. The Federal Reserve continues to raise interest rates, forcing the Bank of Korea to follow suit, which greatly limits the total M2 amount and undermines the driving force of rising housing prices.

Seoul is located near North Korea, and the current South Korean government's resolute move to approach the United States and Japan in politics, diplomacy, technology, military, and other aspects has caused tension on the peninsula. The demand for deepening economic, trade, and technological cooperation with the United States and Japan objectively benefits the second largest city of South Korea, Busan, which is close to Japan. Therefore, the population stock of South Korea may be absorbed by Busan in the future, which is even more unfavorable for the strong housing prices in Seoul.

The South Korean government has taken a series of measures to address the current housing market. The South Korean financial authorities introduced a 50 trillion (Korean won, 50 billion Singapore dollars) rescue plan in October 2022. To expand the implementation of liquidity supply and stabilize the domestic financial market.

The South Korean government relaxed multiple regulations on the real estate market from the end of 2022 to the beginning of 2023, relaxed loan regulations for specific groups, implemented fixed interest rate loan incentives for specific groups, and reduced the comprehensive real estate tax rate. With the timely intervention of the Korean authorities, the real estate financing market showed signs of improvement. In March 2023, the interest margin between Korean corporate bonds and state bonds fell back to a lower level at the beginning of 2022, and house prices also stabilized.

Even though South Korea has adopted a series of financial policies to stabilize the real estate market in various aspects, the overall downward trend of housing prices and debt arrears in South Korea have not fundamentally improved.

On May 24th, the South Korean Financial Services Commission stated that given the global interest rate path and uncertainty, risks still exist. Especially if the structural problems of the South Korean real estate market, such as high debt ratio and strong speculation, are not fundamentally addressed, the export performance as a pillar of the economy is still not ideal. Expecting short-term measures to resolve and stabilize the current South Korean real estate market may be too optimistic.