Stop fueling home prices in Seoul

Seoul Mayor Oh Se-hoon was in the hot seat last week for reversing his controversial decision to lift regulations that were in place to curb real estate speculation in the city’s most sought-after districts. The regulations required buyers in these areas to get approval from district offices and fulfill two-year mandatory occupancy conditions, which means they were banned from purchasing houses with "jeonse."

Jeonse is a lease system in which a tenant pays a lump-sum deposit for a two-year rental. At the end of the contract, the landlord returns the full amount. This system, unique to Korea, makes it financially easier for homebuyers because they don’t need to raise the full amount to purchase a house, thanks to the lump-sum deposit from a tenant.

On Feb. 13, Oh removed these rules, citing concerns over property rights infringement. The move triggered sharp spikes in Seoul’s apartment prices in the following four weeks. In particular, the areas most directly affected — Songpa District, Seocho District and Gangnam District — recorded the steepest increases since 2018.

This was in stark contrast to the prolonged slump in regional housing markets as provinces saw more and more residents move to the capital city for higher-paying jobs and better education.

Spooked by growing public criticism that his “ill-conceived” move fueled hikes in apartment prices in the city’s affluent districts south of the Han River, Oh issued an apology on March 19 and imposed the controversial regulations again on wider areas than he did previously.

More than 400,000 homes in 2,200 apartment complexes in the Gangnam, Seocho, Songpa and Yongsan districts are now subject to the restrictions for six months, from Monday through Sept. 30. The Seoul mayor even threatened to extend the six-month period or designate additional areas that show sharp increases in home prices.

This policy flip-flop has infuriated both homeowners in the four districts and potential buyers because it makes it more difficult for homes to be bought and sold. A bigger problem is that the public has lost confidence in the authorities, especially concerning real estate policies. This makes it harder for any future policies to achieve their intended goals because people just aren't buying what the government says.

However, the real question is whether the latest regulation is effective in curbing housing prices. Given what we have experienced over the years, the answer is no. The tougher the restrictions were, the higher apartment prices went up, at least in Seoul. The city government’s latest regulation is no exception to this.

It will only temporarily rein in apartment prices because it reduces the volume of transactions in the four districts as people cannot buy or sell homes with jeonse. But when the restriction is lifted, as we all witnessed during the recent four weeks, prices will increase at an explosive pace as not only Seoul residents but also people from across the country are eager to own a house in Gangnam, Seocho, Songpa and Yongsan, preferring the areas’ superb residential, educational and cultural infrastructure.

For example, the four districts offer convenient public transportation and a favorable educational environment with prestigious public schools and a cluster of competitive private cram schools. Many large companies are also headquartered in the areas, providing well-paying jobs, while shopping malls, concert halls and other cultural and leisure facilities abound.

These factor explain why housing prices there are substantially higher than in other parts of the capital city.

However, despite such high demand, new homes are hard to come by because there is simply no more land to build apartments on, making homeownership extremely competitive. The only viable way to supply new homes in southern Seoul is to demolish old apartment buildings and reconstruct taller ones. But this is easier said than done as it faces a host of regulatory, administrative and socioeconomic hurdles.

According to the Korea Real Estate Board, the number of new homes in Seoul that people can move into will drop 47.6 percent to 24,462 in 2026 from this year’s 46,710, as construction companies have been reluctant to take on new projects due to soaring costs of raw materials and higher wages amid the economic downturn. The ongoing housing shortage will likely continue in 2027 and beyond.

Coupled with fewer new homes, the demand will be fueled by the Bank of Korea’s further policy interest rate cuts, which will lower borrowing costs. This will prompt more potential buyers to purchase apartments in Seoul, particularly in the four highly favored districts, which will inevitably drive up housing prices.

The only way to ease this growing upward pressure on Seoul’s housing prices is to build a place like the capital city where people want to live. But this is highly unlikely to materialize any time soon — or may never even be possible. It seems unlikely to expect apartment prices in Seoul to decline soon.

Lee Hyo-sik is finance editor at The Korea Times.