“Buying the house in 2021 might be one of the biggest regrets of my life,” says Kim Myung-soo, a 33-year-old whose residence in Jamsil, jap Seoul, has fallen in worth by about $400,000. His spouse is 33 weeks pregnant and Mr Kim doesn’t understand how he’ll repay the mortgage. He had deliberate to attend for costs to rise earlier than promoting the property to repay the mortgage.
Mr Kim is just not alone in his worries. Across the wealthy world, property markets look precarious. Few are in as unhealthy form as South Korea’s. House costs fell by 2% in December alone, the most important month-to-month drop since official figures started in 2003. The stoop has been notably brutal for flats in Seoul: costs are down by 24% since their peak in October 2021.
South Korea’s market presents a glimpse of what might lie forward elsewhere. The Bank of Korea (bok) started elevating rates of interest in August 2021, seven months earlier than the Federal Reserve and nearly a 12 months forward of the European Central Bank. The benchmark charge now sits at 3.5%, a 14-year excessive, after officers raised it as soon as once more in January.
The broader economic system is feeling the pinch. Private consumption fell by 0.4% within the fourth quarter of 2022. And exports, which dropped by 17% year-on-year in January, have hardly cushioned the blow. They had been hit by a collapse in semiconductor orders on the finish of a pandemic-era growth in electronics gross sales. This sluggishness will solely add to the drag on home costs.
There are different sources of stress, too. Household debt reached 206% of disposable earnings in 2021, nicely above even the 148% in mortgage-loving Britain. Some 60% of South Korean housing loans are floating-rate, in distinction with America, the place most lending is on mounted phrases. As a outcome, family funds are squeezed extra rapidly when charges rise. The hazard is that consumers like Mr Kim flip into pressured sellers—one thing he says he’ll attempt to keep away from in any respect prices—which means a slide in home costs turns into a collapse.
This danger is enhanced by the nation’s weird rental system, referred to as jeonse. Many tenants pay big lump sums to landlords, usually 60-80% of the worth of a property, that are returned after two years. In the interim the owner can make investments the money as they need. The system is a relic of South Korea’s speedy industrialisation, when mortgages had been tougher to realize.
In a downturn, some landlords are pressured to make firesales to reimburse departing tenants, having invested in dangerous property, together with extra housing, and misplaced the cash. Stories about sudden defaults and vanishing “villa kings”, homeowners of dozens of rental properties, proliferate.
South Korea additionally demonstrates how excessive family debt and asset costs can constrain financial coverage. Opinion is cut up about whether or not housing-market frailty, and the hit to family incomes, will cease the bok elevating charges additional. Oxford Economics, a analysis agency, thinks the bok will maintain going. Nomura, a financial institution, expects it to reverse course in May, and minimize the benchmark charge to 2% by the tip of the 12 months.
Most international locations will not be as uncovered as South Korea. But some, together with Australia, Canada, the Netherlands, Norway and Sweden, share the identical mixture of excessive family debt and frothy property costs. All started elevating charges after South Korea, and have additional to go earlier than the strain feeds via. They are in for a rocky experience. ■
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Source: www.economist.com”