By Choi Kyong-ae
Three major factors, including a supply shortage, will continue to drive up “jeonse” prices throughout this year, real estate experts said Thursday.
Jeonse prices are again on the rise, after climbing for the past 74 straight weeks in Seoul, according to Real Estate 114, a housing market research firm.
Experts and industry people identified three major reasons behind the continuous increase— supply shortage, ineffective policies and low interest rates.
Under the jeonse system, which only exists in Korea, a tenant pays a returnable lump-sum deposit for a two-year contract instead of monthly rent. Average jeonse deposits now stand at 65 percent of the selling price of a house, up from 40 to 50 percent years ago.
First and foremost, a discrepancy between supply and demand has contributed to a sharp increase in rental costs for jeonse houses.
“Those who live in a jeonse house extend their contracts. And house owners are increasingly shifting the jeonse deals into a monthly rent for financial reasons,” Park Won-gap, a researcher of the wealth management department at KB Financial Group, told The Korea Times by telephone. “Hence, higher demand is driving the prices.”
The country’s average jeonse prices are expected to rise 3 percent this year, slightly below the growth rate of 4 percent last year, the Construction and Economic Research Institute of Korea (CERIK) said in a recent statement.
Secondly, the government’s measures to boost house sales failed to stimulate the sentiment of would-be buyers.
Last year, the government offered stimulus packages, including tax cuts and low-rate loans, to encourage jeonse residents to buy a house. This was also aimed at reviving the nearly moribund housing market amid a prolonged slump in the construction sector hit by the 2008 financial crisis.
However, “efforts to jumpstart the flagging property market didn’t lead to any tangible results amid concerns that the house prices may fall further,” Hur Yun-kyoung, a CERIK researcher, said.
In fact, house prices in Seoul and the metropolitan areas fell 1.4 percent for the whole year of 2013 from a year earlier, KB Financial Group data showed.
Lastly, bank loans available at lower rates have allowed people to finance an increase jeonse deposits. In short, they didn’t need to consider buying a house because it is easy to obtain loans.
“Instead, many potential buyers have put off their plans to become a home owner,” Lee Mi-yun a researcher with Real Estate 114, said in a phone interview.
Looking ahead, experts were of one voice: the housing market is still heading for rock bottom and a full-scale recovery is years away at least.
Still, Credit Suisse Securities took a different view on the property sector.
In a report released Jan. 20, the brokerage said after a long down cycle over the past seven years, the Korean housing market is “fully loaded for the next cycle.”
“The narrowest cost spread between owning and renting and the government’s supportive stance through various policy measures are set to eventually drive a meaningful recovery in 2014 onwards,” Credit Suisse analyst Sinn Min-seok said in the research note.
Park at KB said reports on Korea and its industries made by foreign brokerages often lack understanding of the local markets.
“It is hard to expect any big improvement in the housing market any time soon, let alone a meaningful recovery,” he said.