[One Year of the Yoon Administration]⑫ Avoided a Hard Landing Crisis... The Variable in the Second Half Is Economic Recession

US 'Giant Step' Deepens Transaction Cliff
Buying Sentiment Hits Bottom, Biggest Housing Price Drop Since IMF
Transaction Volume Recovers Amid Comprehensive Deregulation

The real estate market, which started on an upward trend amid expectations of deregulation during the first year of the Yoon Seok-yeol administration, experienced a vertical plunge at the steepest rate since the 1998 financial crisis due to unprecedented interest rate hikes and a transaction freeze. Fortunately, swift deregulation of restricted areas and easing of loan regulations narrowly prevented a hard landing. As transactions revived, cautious talk of a 'housing price bottom' has emerged. Experts predict that the direction of the real estate market in the second half of the year will depend on whether a 'recession' occurs.

Unprecedented Interest Rate Hikes Lead to ‘Transaction Disappearance’... Biggest Crisis Since 1998

After President Yoon’s election in March last year, expectations of deregulation spread, and the real estate market, which had been hesitant due to the Bank of Korea’s interest rate hikes, began to stir. Especially in April and May, the rising trend was prominent in Gangnam and Yangcheon areas, where reconstruction was highly likely, and buying sentiment revived in the Yongsan area due to the office relocation issue.

[Image source=Yonhap News]

However, with the U.S. Federal Reserve taking a giant step (0.75%p increase), expectations of deregulation alone were insufficient to defend against falling real estate prices. As the perception of a housing price peak spread, the nationwide comprehensive housing (including apartments, row houses, and detached houses) sales price index fell by 0.01% in June, marking the first decline in 2 years and 10 months since August 2019.

In succession, in July, the Bank of Korea took a big step (0.5%p increase) for the first time, raising the base interest rate to 2.25%, causing the real estate market to suffer a severe transaction freeze. The volume of apartment transactions in Seoul, considered the 'barometer' of the nationwide apartment market, did not even reach 1,000 per month. The monthly transaction volumes were ▲July 646 ▲August 713 ▲September 608 ▲October 558 ▲November 729 ▲December 834.

The disappearance of transactions quickly led to a sharp price drop. According to KB Real Estate, last year, nationwide apartment prices experienced the largest decline (-3.12%) since the 1998 financial crisis (-13.56%). By city and province, Sejong City (-11.97%) saw the largest drop. Following were Hwaseong, where Dongtan is located (-10.63%), Gwangmyeong (-9.84%), Suwon (-8.47%), Yangju (-7.41%), Gwacheon (-7.16%), Daegu (-7.15%), Daejeon (-6.65%), and Incheon (-6.12%), all falling into a steep housing price slump.

"Prevent a Hard Landing"... Market Revived by Drastic Deregulation

The Yoon Seok-yeol administration implemented comprehensive deregulation measures through the 1·3 policy to prevent a hard landing in the real estate market. All areas except the three Gangnam districts (Gangnam, Seocho, Songpa) and Yongsan-gu in Seoul were removed from the regulated zones, eliminating most of the restrictions that had been tightening the market, including loans, taxes, subscription, and redevelopment projects.

As a result, the transaction freeze began to ease gradually this year. Seoul apartment transactions exceeded 1,000 units in January and reached 2,458 units in February. This was the first time in 1 year and 4 months since October 2021 (2,198 units) that monthly transactions exceeded 2,000 units. In Seoul, both actual demand and investment demand were stimulated, leading to rapid sales of large complexes and small low-priced complexes where prices had dropped significantly, and prices also rose. According to Real Estate R114, 52.2% of Seoul apartments traded in the first quarter of this year were sold at higher prices compared to the fourth quarter of last year.

There is an assessment that the government's deregulation measures combined with the Bank of Korea's two consecutive base rate freezes synergized to narrowly prevent a hard landing in the real estate market. Song Seung-hyun, CEO of Dosiwa Economy, explained, "After the announcement of the 1·3 real estate measures, various regulations such as interim payment loans, restrictions on resale of pre-sale rights, mandatory residence regulations, and subscription requirements were eased, leading to an increase in apartment sales transactions and mitigating the risk of a hard landing for now." Ham Young-jin, head of the Zigbang Big Data Lab, also analyzed, "Transaction volumes increased in the first quarter compared to the end of last year, and the price decline in major areas such as Seoul has also slowed. Although the total number of unsold units increased over the year, liquidity risks for construction companies triggered by the Legoland-related bond market tightening at the end of last year have somewhat eased due to the 1·3 measures."

Conflicting Housing Price Forecasts... Biggest Variable is ‘Recession’

Forecasts for the second half of the year varied among experts. Park Hap-soo, adjunct professor at Konkuk University Graduate School of Real Estate, predicted, "If loan interest rates shift to a downward trend and the depth of the recession is shallow, prices are expected to remain firm." Yoon Ji-hae, head of the Real Estate R114 research team, also said, "Assuming the government successfully manages various risks, the decline could stop and prices could turn upward."

On the other hand, Yang Ji-young, director of Yang Ji-young R&C Research Institute, forecasted, "Since high interest rates continue, although the rate of decline may slow, the downward trend will persist." Chae Sang-wook, CEO of Connected Ground, also said, "In the first half, the special Bogeumjari loan and preemptive effects of interest rate cuts led to a 'fake bull market,' but in the second half, the housing price decline could deepen."

The biggest variable influencing housing prices in the second half was identified as the ‘recession.’ Song Seung-hyun, CEO of Dosiwa Economy, said, "Going forward, a recession is more dangerous than interest rates," adding, "During a recession, it will inevitably be difficult to revitalize the real estate market."