How expensive is it to buy a house in Seoul, the capital city of South Korea? According to Numbeo, a website comparing the living and housing costs in cities around the world, Seoul’s price to income ratio; a ratio showing how many years it takes for an average household to buy a house; is 24.88. This means it takes 25 years for an average household to buy housing without spending any income it earns. The same ratio for New York is 10.4, Tokyo 14.68, Hong Kong 46.94, Singapore 20.92 and London 17.15 in April 2020.

Whilst not the most expensive housing market in the world, the pace at which housing prices have increased is quite astonishing. According to an article published by Maeil Business Newspaper, the total market capitalization of Seoul’s housing market doubled from October 2014 to September 2019 (from approximately $500 million to $986.4 million).

Having witnessed a very steep rise in housing prices in Seoul in the last few years, many young South Koreans have jumped into the housing market by taking out loans and buying properties sooner rather than later.

What is concerning, however, is that many households took on excessive debt to buy housing in South Korea, which stands about $1,315 billion at the end of 2018. This has been increasing consistently throughout the last two decades. The following table shows how steeply Korean households accumulated debt, largely owing to buying housing.

 

Household credits and loans in South Korea

Source: Bank of Korea, Federal Reserve Bank of ST. Louis

When the interest rate is low enough, households can continue to service the debt. But if and when the interest rates start to rise, then 1) people cannot service its debt and interest payment, 2) mortgages go bust, 3) homes are sold to pay off debt, 4) supply increase depresses housing price, and eventually 5) the bubble bursts as more and more homes are sold. This is precisely what happened to Japan in the 1990’s when the central bank increased interest rates.

Of course, interest rates are influenced by numerous other factors, such as the exchange rate, economy and future expectations. Moreover, the interest rate is more likely to head downwards, especially when every central bank in the world has rushed to cut rates and inject huge liquidity into capital markets to mitigate the devastating effects of COVID-19.

 

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However, interest rates are not the only catalyst that could burst the bubble. Many people have lost their jobs and are shutting down their businesses because of COVID-19. As a result of this, stock prices have plummeted, and housing prices stopped climbing recently. Even without the short-term pandemic, the fundamentals of the Korean economy have been declining due to structural problems and decreasing exports.

The Korean housing market makes up approximately about 70% of total wealth in South Korea. Such a disproportionately high concentration of wealth coupled with Koreans’ love for real estate, strengthens the belief that land price never loses and Gangnam is the best place to live for good education.

Will the Korean housing bubble burst? Maybe not in the short term, as there are still many Koreans waiting to buy housing at whatever cost in Seoul. However, household debt is only manageable when the economy is growing to pay off its principle and interest payments. Whilst Koreans’ love for housing in Seoul is understandable, when the economy is slowing and moving towards a recession, soaring housing prices fueled by excessive household debt may be a red flag.

 

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