In an Era of Tightening, Outlook for Korea’s Housing Market [Tightening, the Party Is Over]

With Allookso announcing it will shut down its service at the end of 2024, I am publishing here the full text of the column I contributed to Allookso in June 2022 at their request.

[Editor’s Note]
Let’s get straight to the point: “When the pace of money printing slows compared with the past, what happens to the price of the home I live in (or want to buy)?” Investing in a home and actually living in it are two different questions. In determining real estate value, the rental market is the primary driver. Seong Ryun-soo, an Allooker, notes wage growth and interest rate hikes driven by US tightening, and argues that it will be difficult for apartment prices in preferred areas to keep trending downward. That is, unless we are talking about properties that rose purely on liquidity and excessive expectations.

“A look at Korea’s housing market outlook in an era of tightening.”

The topic I was asked to write on this time is, in fact, riddled with misleading terms.

First, in the modern economy there has never been a true era of tightening. Tightening literally means pulling back money that has already been injected, but in modern history there has been no case of money actually being withdrawn once supplied. Liquidity is like the Big Bang: once it starts expanding, it keeps expanding. That is how the system is designed.

If you look at a chart of year-on-year changes in US M2 money supply, not a single year has dipped below 0%. The 1970s, famous for high inflation and high interest rates, actually show relatively high money supply growth. In my view, what we commonly call a “tight monetary policy” is closer to an outcome than a cause.

Second, the notion of a “Korean real estate market” is itself ambiguous. In equities, we have commonly referenced indices like KOSPI 200 or the S&P 500, and we can check daily how they move. People broadly share a similar concept of what the stock market is. Real estate, by contrast, is the only asset that is absolutely essential to our lives. When we say Korean real estate, it spans land, retail space, apartments, villas, office buildings, and more, but what readers usually have in mind is “the residential property where I live or want to live.” It is hard to ignore the desire to live somewhere better.

Now that I have explained why the original topic is misframed, let’s remodel it to reflect reality and what readers truly care about: “When the pace of money printing slows compared with the past, what happens to the price of the home I live in (or want to buy)?”

Because residential property is an asset you cannot live without, you must choose one of two options: own or rent. The fact that roughly half the population chooses to rent implies that, within the remaining half, some portion is effectively compelled to hold multiple homes. By “compelled,” I do not mean they are forced at gunpoint; I mean the investment environment becomes so attractive that it feels almost irrational not to invest. Think back to around 2017, when the jeonse-to-sale price ratio for Seoul apartments shot up to 80%. That is exactly the kind of environment I mean. For reference, corporate landlords still account for a very small share of the Korean rental market. Without multi-home owners, the rental market simply does not function.

Investing in a home and living in it are separate issues. Your personal circumstances always come into play when it comes to where you live. Someone whose job is in Seoul cannot rent a place in Daegu. But that same person can rent in Seoul while owning property in Daegu.

To be crystal clear for anyone still unsure: the primary factor in determining real estate value is the rental market. The people who have compelling reasons to live in a given area are tenants, not landlords. Just as we often use PER (price-to-earnings ratio) when valuing companies, in real estate we have the cap rate. It measures rental income relative to property value. The lower the cap rate, the more the property resembles a “growth stock” in equity terms. The immediate cash flow relative to the investment amount is not great, but investors have strong expectations that the property’s value will rise significantly over time.

Let’s look at KB Real Estate’s apartment rent index. Apartment rents keep climbing. Given that the rental market is also governed by supply and demand, this tells us that demand from tenants who want to live in apartments is currently strong. In stock market terms, Korean apartments today are “assets with steadily rising earnings.” In equities, we call such assets blue chips.

It is hard to argue that such high-quality assets will trend downward over the long term. That would require a surge in new supply and a decline in demand. The economy would also need to enter a prolonged slump, with wage growth stalling or even wages themselves falling. In other words, we would need a macro environment similar to post-bubble Japan.

To put Japan’s real estate bubble in Korean terms, imagine a Jamsil apartment (84㎡ exclusive area) worth 1 billion won in 2016 soaring to 8 billion won in just three years. Even taking into account that, after the introduction of the land transaction permit system in June 2020, price growth lagged behind surrounding Gangnam areas, current asking prices are only around 2.5–2.7 billion won. Seoul apartment prices have risen sharply over the past five years, but not to an extreme degree. Considering that prices were already around 1 billion won in 2010 and then moved sideways until 2017, this is even more true. If you calculate the compound annual growth rate over the 12 years from 2010, you get about 8% per year. Is that really an unbelievable, runaway increase?

Recently, wage growth led by large corporations and startups has also been substantial. Even at LG Group, long known for relatively modest pay among major conglomerates, average annual salary increases have reached around 10%, outpacing inflation in many cases. Restaurants are struggling to hire part-time workers even at 12,000 won per hour—more than 20% above the minimum wage—showing that wage pressures are spreading across age groups.

For Seoul real estate to trend downward from here, the premium on these assets—in PER terms, the “R” for ratio—would have to compress. The public seems to justify this mainly by pointing to “interest rate hikes driven by US tightening.” That is because rents (earnings) are rising, there is little new supply of brand-new apartments, and where there is, it tends to be localized (as in Daegu or Sejong) rather than nationwide. In the end, the only coherent argument the bears can lean on is “higher interest rates.”

If interest rates rise, the jeonse-equivalent value of a given rent falls, so areas that saw heavy gap investing—for example, Banpo, one of the few Gangnam neighborhoods not covered by the land transaction permit system—could experience short-term weakness. But Banpo is also one of the most sought-after residential areas for Seoul’s top income earners.

You need to think carefully about whose income will grow faster: the people living in those wealthy neighborhoods, or your own. Our society is increasingly shifting toward a norm where those who generate greater productivity must be given “appropriate compensation.”

To sum up: it will be difficult for apartment prices in areas people like to keep trending downward. Because apartment supply is limited, short-term weakness in sale prices (due to reduced investment demand) will almost inevitably translate into higher rents (as multi-home owners pull listings). If rent growth continues to outpace sale price growth, investment demand will return, pushing up the value of those properties again.

In today’s Korea, unless a property has been driven up purely by liquidity or excessive expectations, the probability of a sustained decline in its price is low. If, for whatever reason, sale prices in an area where you live or want to live fall or even plunge despite a steady uptrend in rents, that is, in my view, a perfectly reasonable time to buy your home. It is unlikely that such a property is attractive only to you.