[Choi Jun-young's Urban Pilgrimage] The Past Real Estate 'Supercycle'... Adjustment Breathing Space

Supply Shortage, GTX, and Increased Liquidity... Heating Up the Real Estate Market
Transaction Volume Declines Since Q3 Last Year Due to Stricter Regulations and Higher Tax Burdens
Seoul Housing Supply Hits Record Low, Ongoing Difficulty in Tightening Loan Regulations

Signals are emerging everywhere that the housing price increase, which has continued for more than five years since 2015, is stopping and shifting into a decline phase. Prices in areas that surged due to expectations of improved transportation conditions from GTX connections are falling, and in Daegu, which had been easily absorbing large supplies, unsold units are rapidly increasing. In Seoul's core areas, new record prices are still occasionally recorded despite the transaction stagnation, but the rapid rise seen in the past is hard to find. With interest rate hikes added to curb inflation, expectations and concerns are spreading that the awaited stabilization of housing prices may be surpassed by a full-fledged decline.

The causes of the housing price increase since 2015 can be broadly divided into four factors. First, a shortage of supply. Following the global financial crisis in 2008, the market cooled, and large-scale supplies such as public housing led to housing price declines, causing developers and construction companies to drastically reduce housing supply, mainly in the metropolitan area. In particular, in Seoul, large-scale redevelopment projects represented by New Town were suspended or canceled, significantly reducing supply. Second, an increased emphasis on transportation conditions. Unlike in the past, as the proportion of dual-income households rose, the demand for proximity between residence and workplace surged due to reasons such as child-rearing. As a result, new towns experienced prolonged price declines, while housing prices in areas previously less preferred as residential zones, such as Mapo and Seongdong, surged. Third, income growth. Salary increases, mainly among large corporation employees, continued, and with the normalization of dual-income households, household purchasing power for housing expanded. Fourth, a reduction in financial burden. The expansion of long-term mortgage loans and the continuation of low interest rates greatly reduced the burden of purchasing housing compared to the past. Although the shift from lump-sum principal repayment to equal principal and interest repayment increased the burden due to rapid loan growth, the low interest rates lowered the overall burden.

The housing price increase triggered by these four factors brought out latent housing demand, and with the addition of internet cafes, bands, YouTube, and various lectures, the demand base expanded further. Considering that it usually takes about 3 to 5 years for supply to materialize, once the housing price increase started, it inevitably continued for more than three years. Moreover, in Seoul and the metropolitan area, various controversies and confusion over the necessity and methods of supply caused delays of more than two years, worsening the mismatch between supply and demand. The accommodative monetary policy restarted to overcome the economic recession caused by the spread of COVID-19 starting in 2020 caused all asset prices to surge, and profits realized in stocks and cryptocurrencies flowed back into housing and real estate, further expanding the rise.

This seemingly endless trend began to change from the third quarter of 2021. Due to continuous regulatory tightening and increased tax burdens on multi-homeowners, the housing purchase trend completely shifted to single-home ownership, dramatically reducing transaction volumes. Furthermore, interest rate hikes to counter inflation began and became certain to continue, freezing housing purchase sentiment further and cooling the market itself.

To predict how the housing market will change in the future, the four previously mentioned factors driving the rise must be re-examined. Regarding supply, efforts to accelerate reconstruction and redevelopment, such as the 3rd New Town projects targeting the metropolitan area and the rapid integrated planning, are ongoing. Although supply is not immediately materializing, pre-sale subscriptions are absorbing some demand, easing existing housing purchase demand. In terms of urban transportation conditions, the full-scale start of the GTX project, extensions of existing subway lines, and supplementation of light rail lines such as the Sillim Line are progressing, alleviating some of the demand for proximity between residence and workplace. Income growth continues mainly among high-income groups, but most of them already own homes and avoid multi-home investments as before due to tax burden concerns. Although there is migration demand centered on high-priced homes in certain areas, its overall market impact has decreased. Regarding financial burden, interest rate increases are certain to continue. Considering this, many of the factors that caused the rise over the past six years have mostly been resolved or eased, and thus the housing market supercycle can be considered to have ended.

However, looking in detail, housing supply in Seoul is at an all-time low, and there is no suitable way to increase it rapidly. Also, it is practically difficult to maintain the current tax system, including comprehensive real estate tax, capital gains tax, and acquisition tax surcharges, and the ban on loans for homes over 1.5 billion KRW cannot continue indefinitely. With the presidential and local elections following one after another, various development and supply expansion pledges to be presented may change market sentiment again, and some policy changes are inevitable. Considering these circumstances, it is more accurate to view the current situation not as the start of a decline cycle but as a pause for the market to find its direction.

Many hope for a decline in housing prices, but in an inflationary era where everything rises, housing prices alone cannot remain stable. Based on the realistic recognition that an increase at the level of inflation rate is inevitable, continuous execution of promised supply and gradual easing and reform of related policies and systems are required at this point.

Legal Specialist, Yulchon LLC