On August 2nd of 2017, the Korean government released new real estate measures to address real estate related issues. In the current state two months have passed since a release of new real estate measures; therefore an interim check is needed. The Sungkyun Times (SKT) now introduces the growing Korean real estate problem, the government’s real estate policy and real estate policy in Singapore.
Overheating Problem of Korea’s Real Estate Market
These days, there are two main real estate phenomena in Korea. First of all, about 70% of Korean household property was found to be real estate. There is a serious reliance towards real estate, which causes growth and decline in the real estate prices that are used as an indicator that determines the economic level of households. Real estate assets actually account for a large portion of one household’s assets. According to the National Statement of Financial Position for 2015 published by the Bank of Korea and Statistics Korea, real estate assets such as development, land, and stocks took up 73.9% of the net assets that one household averagely gained. This percentage was 75.4% in 2013 and 74.6% in 2014. Beyond the huge portion of real estate in an individual’s property portfolio, 87% of national property is also found to be real estate. Like this, as the importance of real estate in Korea is growing, Korea has even started to be referred to as the “Republic of Real Estate.” 87.3% of the domestic net assets (assets-liabilities) of the nation is tied to real estate such as land and buildings. As a result, real assets such as buildings and facilities, which are non-financial assets, account for up to \12,126.5 trillion, taking 98.1% of whole national assets.
Secondly, there has been a rapid increase in house prices in Korea. As a result, the poor situation of the homelessness continues and those who cannot afford a home suffer from the sense of deprivation. According to KB Kookmin Bank, the price of Seoul apartments rose 0.13% on a weekly basis until June 29th of 2017 and had kept increasing for consecutive 17 weeks. The increase was the largest during a seven-month period since October 2016. In addition, according to a recent paper by the Korea Institute for Health and Social Affairs, the top 10% of asset holders had 54.3% of domestic net assets, and the percentage of real estate’s contribution to inequality was 93%.
Causes of the Overheating Phenomenon
There are two main causes of Korea’s real estate situation.
Firstly, many Koreans regard buying houses as a means of investment, and this inclination is becoming aggressive. Being absorbed in the past experience of earning a lot of money through real estate during its heyday, many people in Korea are living in debt to buy a house and earn regular income. Individuals account for 81% of the rental housing supply in Korea, while the percentage is 66.5% in Japan, 64.1% in Germany, 56.3% in the United States (US) and 53.1% in the United Kingdom (UK). In addition, the older Korean generation has invested in real estate to prepare for their later years. According to the Korea Appraisal Board Real Estate Research Institute’s report in October 2016, people who are in their 60s or older, who were predicted to get out of the housing market due to aging, will increase their rate of buying houses and continue to be active in the real estate market for several years to come. Chae Mi-Ok, the head of the real estate research institute said, “In the housing market in Korea, people who are in their 60s or older are emerging as powerful investors who should not be ignored.”
Moreover, there is a change in demand toward housing in the metropolitan area. As the standard of living improves, the polarization of house prices in the metropolitan area and provinces is getting worse because many people consider regional conditions like traffic and education as important factors in their lives. According to the Korea Appraisal Board Real Estate Research Institute’s report in July 2017, the rate of house price increase in the Seoul capital area was expected to be 0.4% while it was 0.2% in the provincial areas.
Current Real Estate Measures of Korea
The Korean government has prepared some measures to overcome the problem of the real estate market and is currently in operation.
Real Estate Measures Released on August 2nd
|The Ranges of the Adjustment Target Areas, Speculation-ridden Areas and Speculative Areas/ Ministry of Land, Infrastructure and Transport|
The whole of Seoul city was designated as speculation-ridden, speculative, and adjustment targeted areas, and different regional regulations are applied to each area. There are two big changes in regulations, the strengthening of housing-secured loan regulations and the imposing of transfer tax to multi-house owners, who own two or more houses.
LTV is the rate of the amount of mortgage loans compared to house prices. This is a limit of allowing a loan within a certain percentage of the real estate appraisal value if one wants to get a loan secured on real estate.
DTI is the rate of financial debt of the borrower’s principal and interest compared to the income of the borrower. In other words, when a person takes out a mortgage loan, his or her income is considered as an element of the decision for the loan being granted.
In the past, the Loan-to-Value ratio (LTV) and Debt to Income ratio (DTI) had a limit of 60% and 50% respectively regardless of housing types, loan maturity, or loan amounts in speculation ridden and speculative areas. Now, however, the limit of the regulation ratio was strengthened to 40% each, and strengthened to 30% each for household members who have more than one mortgage loan when receiving additional loans.
Furthermore, the transfer tax of multi-house owner’s houses will be burdened. The government regarded speculation of multihouse owners as a cause of the rise in real estate prices in Seoul. The new regulation, however, will be applied to houses that are transferred after April 1st of 2018.
Singapore: A Country that Promotes Public Welfare in Real Estate
The Korean government, whose citizens tend to think of real estate as a thing to buy and sell rather than a place to live, needs to carefully look at the real estate policy of Singapore which publicly supports its citizen’s living environments.
Singapore is a high-density urban city with a population of about four million. The availability of residential facilities was limited, but the government’s strong policy initiatives were supported. Korea puts 0.5% of government budget on housing, but Singapore puts 3.8% with the primary goal of providing a home for anyone in Singapore. Consequently, most of the people own their own house. 82 to 85% of the people live in Housing Development Administration (HDB) apartments supplied by the government, and only 20% of the wealthy people own their private houses in Singapore. HDB apartments vary in six different forms from one room to five rooms with three bedrooms, one living room, and one kitchen. The most common HDB apartment is a four-room (two-bedroom) house of 90 square meters, equivalent to a 27-square-foot apartment in South Korea. HDB apartments can be supplied up to two times in a lifetime, and the government lends most of the house price, approximately 80% for tenants, through a longterm low interest loan with an interest rate of 2% per year.
To people in other countries, real estate property or houses may only refer to places for families to live in. In Korea, however, real estate has an especially important position as it is a means to earn money. Real estate measures in Korea have changed and will change over time as the overheating phenomenon of the Korean real estate market has been a long-standing issue. Kim Dong-Yeon, a vice prime minister and secretary of the Ministry of Strategy and Finance claimed that if needed, additional measures will be made. Therefore, as an individual living in Korea, there is a need to know and pay attention to them more carefully.
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