House prices in South Korea are slowing down
January 13, 2017
Seoul's house price index rose more than the national index, up by 2.35% y-o-y (1.04% inflation-adjusted) in November 2016.
- Busan, the country's second biggest city, had the highest house price rises of 2.95% during the year to November 2016.
- Busan and Seoul were followed by Incheon (0.79%), Ulsan (0.69%), Gwangju (0.49%), and Daejeon (0.20%). In contrast, Daegu, the country's fourth biggest city, saw a house price decline of 1.83%.
- Out of the country's 9 provinces, Jeju had the sharpest house price hike of 6.27%. It was followed by Gangwon (1.39%), Jeonnam (0.99%), and Gyeonggi (0.98%). House prices in Jeonbuk saw no rise.
- The provinces of Chungnam (-1.60%), Gyeongbuk (-1.58%), Chungbuk (-0.80%), and Gyeongnam (-0.30%) saw y-o-y house price declines.
Why the slowdown? Because lending rules were tightened by the government at the start of 2016, and there's an oversupply of housing. "Purchasing sentiment was dragged down by the government measures, along with a rising supply of new houses," said the Korea Development Institute (KDI).
Already in the second half of 2015, pre-sales were way beyond the inventory needed, raising oversupply concerns, according to ratings company Nice Investors Service. The ratio of housing supply to households went up from 98.3 in 2005, to 103.5 in 2014, according to the Ministry of Land, Infrastructure and Transport (MOLIT), indicating that housing supply currently exceeds the number of households. Unsold houses declined to around 61,512 units in 2015, from a peak of about 123,297 unsold houses in 2009.
In addition, the country's large household debt - about 88.4% of GDP - has made repayments onerous for some households, compelling South Korea's Financial Services Commission (FSC) to increase the minimum proportion of fixed-rate and amortising home loans to around 30% of the banks' total mortgage loans in 2016, and around 40% by 2017. However outstanding mortgages were only 32% of GDP in 2015, up from 28% of GDP in 2007.
A fresh set of curbs introduced by the government in November 2016 required property buyers in Seoul to retain ownership for 18 months from the date of purchase, a substantial increase on the current six months waiting period. Aside from that, downpayments will also be increased to 10% of the housing values.
“We plan to take preemptive measures to stabilise the property market in all of Seoul, Sejong, and parts of Gyeonggi province and Busan, to make sure the market is focused on actual demand,” said outgoing Finance Minister Yoo Il-ho.
Upon conclusion, a property sale contract must be recorded by the foreigner to the head of the Shi/Kun/Ku (city/county/ward). If the property is located in military installation protection areas, designated cultural properties, and ecosystem conservation areas, foreigners “shall obtain permission from the head of Shi/Kun/Ku before the conclusion of the contract” .
Seoul, South Korea - a lack of sales data
We tend to experience difficulties in assessing the buying prices for apartments and villas in Seoul, due to the paucity of offers for sale in English language, and this year has been no exception. Our research suggests that both upper-end apartments in central Seoul and villas rent for around US$29 per month per square metre (sq. m.).
Because of the difficulty of finding buying prices, we have no gross rental yields figures for Seoul.
South Korean taxes are from moderate to high
Rental Income: Rental income tax is from 6% to 42% for limited liability companies and 10% to 22% for stock companies. Value Added Tax on gross rent is 10%.
If the rental income is less than KRW24 million (US$21,622) and the property value is assumed to be under KRW900 million (US$810,811), a special method for the calculation of the personal taxable income is used. In the sample calculation provided, effective income tax amounts to 2.48% of the gross rent, given that the annual rental income is KRW20.7 million (US$18,649) and under certain assumptions.
Capital Gains: Capital gains taxes are around 6% to 38%. A special deduction applies if the property is held for more than three years.
Inheritance: The inheritance tax is between 10% and 50% depending on the property value.
Residents: Residents are taxed on their worldwide income at progressive rates, from 6% to 42%.
Buying costs are high in South Korea
Total roundtrip transaction costs can range from 21.45% to 22.90%. The realtor’s fee is regulated at 0.20% to 0.90%, but actual payments are typically higher. The 10% Value Added Tax (VAT) is imposed on all properties. Buyers must also purchase National Housing Bonds worth 5% of the property value; typically sold immediately at 10% to 15% discount. All costs are paid by the buyer.
South Korean landlords benefit from key money
The rental system in South Korea is pro-landlord.
Key Money: With any of the standard rental schemes, the landlord receives a huge amount of money up front, protecting him from erring tenants. In the 'wolse 2' system (the most common for expats), the entire rent is paid upfront, with no refund for early termination.
Tenant Security: Tenants are expected to move out of the property as soon as the lease term expires and the key money returned.
Manufacturing decline weakened South Korean economySouth Korea is Asia's fourth largest economy and the world's 7th biggest exporter, with exports accounting for half of its GDP. So the sluggish performance of exports in 2015 was a major drag on the economy. During the year exports dropped by 7.9% in 2015, the country's worst decline since 2009.
Exports improved in 2016, increasing by 2.7% during the year to Q3 2016, according to the Bank of Korea (BOK), driven by semiconductor and chemical product sales.
In the third quarter of 2016, the economy expanded by 2.6% from the previous year. The construction sector's gain of 3.5% q-o-q (11.4% y-o-y) supported growth in Q3, but manufacturing contracted by 0.9% due to the current troubles faced by two of Korea's famous brands, Samsung Electronics and Hyundai Motor.
"Growth in manufacturing slowed considerably as halted production of Samsung's Galaxy Note 7 and strikes at Hyundai Motor hit overall production, consumption and exports of the auto and smartphone industries," according to Chung Kyu-il, a director at the Bank of Korea (BOK).
"Losses linked with the Note 7... may further impact fourth-quarter growth as well,"said Chung.
Hyundai, a top South Korean automotive manufacturer, was also facing turmoil due to strikes from July to October 2016.
In November 2016, inflation rose by 1.3% y-o-y, up from 1% in November 2015.
Unemployment was 3.1% in November 2016, unchanged from November 2015, according to the Korean Statistical Information Service (KOSIS).
On August 20 2015, tensions between North and South Korea rose after North Korea fired a shell on South Korea's borders, causing the latter to respond by launching artillery rounds. A few days later, both parties reached an agreement.
In January 2016 North Korea claimed to have tested a hydrogen bomb estimated to be "50 to 100 times the power of the bombs on Hiroshima and Nagasaki," according to nuclear scientist Imad Khadduri. Before North Korea announced the claim, South Korea's meteorological agency detected a 5.1 magnitude earthquake near a recognized test site.
On January 13, 2016, South Korea warned North Korea of 'bone-numbing' sanctions that the United States and its allies might impose.
Another presidential scandal!
The fate of Park Geun-hye as South Korea's president is currently in the hands of the Constitutional Court of Korea, which must decide whether to accept her impeachment, voted by 234 out of 300 members of the National Assembly on December 9, 2016. The court's process is expected to take up to 180 days. Prime Minister Hwang Kyo-ahn will meanwhile be the country's acting president.
The impeachment stems from investigations into President Park Geun-hye's relationship with Choi Soon-sil, daughter of shaman-esque cult leader Choi Tae-min, which started in October 2016. Choi Soon-sil, a presidential friend with no government position, was reported to have had access to confidential government documents and to have acted as an informal adviser to the president. Choi was also reported to have used her connection to the president to pressure large companies to donate millions of dollars to the Mir and K-sports foundations ― non-profit foundations that Choi controls.
Choi was formally charged on November 20, 2016. Aside from Choi, two presidential staff members, An Chong-bum and Jung Ho-sung, were also charged for abuse of authority and for aiding Choi. President Park was also said to have a role in the corruption scandal.
A few days after President Park publicly acknowledge her close ties with Choi, the president dismissed key members of her staff. Her approval ratings fell to a historic low of 4%.
On November 12, there were mass protests demanding Park's impeachment or resignation at Gwanghwamun Square. Another national protest was held on November 19, after Park had declined to aid the investigation.
On November 29, 2016, Park offered to resign as president, and invited the National Assembly to arrange an orderly transfer of power. However, the opposition parties were against Park's proposal and accused her of attempting to avoid impeachment.