The prices of apartments in Seoul plummeted last week by the largest margin in nine years and one month. The prices are showing a 15-week in-a-row decrease. Apartment prices in Seoul metropolitan areas also dropped significantly in 10 years. The prices of jeonse - homes rented on long-term deposits - across the nation showed the biggest decline of 0.16 percent compared to last week.
These days apartment prices and jeonse prices are showing unprecedented steep declines. Most people feel that housing prices are too high in Korea, but rapid increases in interest rates have frozen the demand for buying homes and moving even more. As the prices of apartments in the Gangnam area in Seoul even dropped by hundreds of millions of won, even those with actual demand are trying to ‘wait and see,’ drying up the buying trend.
Still, apartment prices in Seoul are too high to the extent that an average worker has to save up all the 36 years of yearly pay to buy an ordinary apartment in Seoul. The former Moon Jae-in administration’s housing policy only focused on containing demand, and too much liquidity in the housing market post-Covid-19 led to a steep increase in housing prices, thus bubbles. Skyrocketing housing prices in the U.S. also show a downward trend in three years, which is a global trend.
However, the declines in housing prices and jeonse prices show some adverse effects. Those who bought houses by fully taking out loans suffer as the interest rate burden increases, but housing prices go down. According to the Bank for International Settlement, Korea has shown the biggest increase out of 43 key countries in household debt to ratio. Plummeting housing prices accompanied by skyrocketing interest rates could lead to household debt insolvency, which can cause a crisis in the financial sector, including banks. As the number of so-called ‘tin can’ houses increased, there are more cases where homeowners fail to give a jeonse deposit back to their tenants as house prices fell bigger than jeonse prices.
As people tend to rush into the housing market when there is a psychological trigger, the declining trend could lead to a series of shocks that can surface various problems, such as household debt and jeonse supply overtaking demand. The trading volume in the housing market has shrunk to one-ninth of the previous year. And this is a warning of a steep decline in the future. Policy rates are expected to increase until next year. The government must be prepared for the possible hard-landing of the housing market.