South Korean housing market hindered by traditional system

This time last year, South Korea's property market couldn't have looked bleaker. National home prices had been falling or, at best, remained flat for 12 straight months - a situation exacerbated in July last year, when apartment transactions in Seoul plummeted by 80 per cent in a month after the expiration of temporary tax cuts that had been designed to kick-start the market.

It was the worst slowdown since 2004, and few could see an end to the pain. Unmoved by low prices and successive interest rate cuts, South Koreans, already heavily leveraged compared to their global counterparts, increasingly opted to rent rather than buy. As homes languished on the market and the rental sector tightened, a loss of faith in the housing market seemed the only explanation.

The depth of the dip was underscored in a recent report by Nomura, a Japanese investment bank, which notes that South Korea is the only property market in Asia which has failed to bounce back from the global economic crisis. House prices have gained only 11 per cent from December 2008 levels, compared with Hong Kong (134 per cent), India (104 per cent), the mainland (94 per cent), Taiwan (85 per cent), Malaysia (68 per cent) and Singapore (32 per cent), according to the report.

Recognising the threat this posed to the national economic recovery, the government stepped in to reinstate tax cuts for homebuyers, effective from August 28 last year. Almost immediately, the market moved in a positive direction.

Nomura noted the turning point, describing South Korea's property market as "nascent", and forecasting that its recovery will gain momentum in 2014/15. "This should raise both GDP growth [from 2.8 per cent in 2013 to 4 per cent in 2014], and CPI inflation [from 1.3 per cent to 2.3 per cent], while reducing the current account surplus [from 5.8 per cent of GDP to 4.1 per cent], paving the way for a 25 basis point rate hike to 2.75 per cent in December 2014," it predicts.

However, that would depend on the orderly abolition of "jeonse" - South Korea's unique housing lease contract system, which leaves large amounts of potential home deposits locked in the rental doldrums.

Derek Long, a director of arc4, a Britain-based housing and data consultancy, explains that jeonse is a legacy of the Korean war, after which the urbanisation of South Korea lagged behind other industrialised nations. "As a result, the government committed to a rapid expansion in the number of housing units. Because bank lending was targeted at economic growth, a 19th-century version of an ancient instrument, jeonse, emerged as an alternative to conventional home ownership."