Housing market recovery to gain speed

People line up at a display home for Centlas apartments in eastern Seoul, last week. The housing market is recovering from a long slump partly due to a recent decision by the Bank of Korea to cut its rates. / Yonhap

By Yoon Ja-young

The housing market is recovering from a long slump on a key rate cut by the central bank, as well as continuous deregulation by the government.

Analysts expect the recovery mood to continue for a while, but a key rate hike by the United States remains a major risk.

“Some of the customers who were seeking jeonse decided to buy an apartment instead, as it is extremely difficult to find one, not to mention the high jeonse prices,” said Lee Ju-young, a real estate agent in Sindang-dong, downtown Seoul.

“Even when they buy homes with mortgages, it isn’t because burdensome as before as the interest rate is falling,” he added.

Jeonse is Korea’s unique property rental system where tenants pay a lump sum deposit to a landlord at the start of a rental contract. The tenant gets the full deposit back at the end of the contract, which typically lasts two years.

However, the steep rise of jeonse prices is prompting more people to buy a house instead. These former tenants are leading the recovery of the housing market. Apartment prices in Seoul rose by 0.18 percent from the previous week, according to Korea Appraisal Board.

According to GS Engineering and Construction, 5,911 people applied for the 580 apartments in a complex it is building in Cheongra, Incheon. Cheongra had suffered a real estate slump for a few years, but recently has seen the number of buyers increasing.

Jungheung Construction, which is building 665 homes at Myeongji, Busan, also saw 5,465 people applying to purchase them.

Kim Eun-jin, chief analyst of Real Estate 114, a real estate market information provider, said the key rate cut by the central bank will accelerate the housing market recovery. The Bank of Korea recently cut the rate to a historically low 1.75 percent.

“Due to the low interest rate, landlords have little interest to gain by depositing the jeonse deposit they get into a bank savings account. They prefer getting monthly rent instead,” she said.

The falling interest rate leaves landlords with two options ― to raise jeonse deposits to get more interest, or to collect monthly rent instead. Either way, it leads to a jeonse price hike. Meanwhile, the low interest rate means tenants can buy houses instead with less interest burden than before.

“The jeonse homes will decrease and more people will seek to buy homes. Those seeking real estate investments will also increase thanks to the low interest rate,” she added. People are turning their eyes from bank savings to more aggressive investment tools such as real estate and stocks.

Kim advises that tenants consider buying a home, but she said she is still cautious about the idea of buying a home as an investment.

“If you buy real estate with too much in loans, the financial burden can become huge when the key rate is raised later on. When considering the real economy, there are still uncertainties. Real estate prices aren’t likely to rise steeply as they did during the housing bubble,” she added.