South Korea’s soaring property prices dash home ownership dreams for ‘dirt spoons’
- Seoul is struggling to curb runaway home prices, which have risen an eye-watering 34 per cent on average since President Moon Jae-in came to power
- His ruling Democratic Party has pushed through a slew of measures in a bid to cool the market, but prices – and the public’s anger – continue to rise
When John Chung bought his first flat in the Seoul subdistrict of Banpodong in 1987, he never could have imagined what a stellar investment it would turn out to be.
The 53 square-metre space in an old, low-lying flat block south of the Han River cost him and his wife 27.5 million won – or about 90.6 million won (US$76,400) today, adjusted for inflation.
What made Chung’s flat so valuable, however, was its trade-in value. In 2009, the building in which it stood was torn down to be replaced by a gleaming new high-rise, inside which Chung was offered a 297 square-metre apartment for the discount price of 1 billion won in return for giving up his old flat.
“Now I have no houses,” he said, ruefully. “Who would want to work honestly when you can clear such easy profits by buying houses in Seoul?”
In the eight years before he took office, by comparison, house prices rose just 24 per cent, according to Seoul-based NGO the Citizens’ Coalition for Economic Justice.
The recent surge has dashed the hopes of many young families and signalled that the “middle class contract” that helped build Asia’s fourth-largest economy may have slipped out of reach.
A central promise of Moon’s upon coming to power was to create a level playing field for all South Koreans and a society where hardworking people could raise a family and afford a home.
But new rules and penalties aimed at discouraging speculative transactions have failed to make an impact, even contributing to higher rents and larger down payment requirements in some instances – hurting those the policies are intended to help.
Compared with other OECD countries, South Korea’s public housing is also too small to fend off avaricious speculators in real estate, while tenants’ rights are not well protected and tax favours for multiple house owners are still too generous, said Kim Ju-ho of the Citizens’ Coalition of Economic Justice, a well-known NGO.
“One of the most fundamental solutions would be for the government to provide many long-term public housing for low rent”, Kim said.
“Frustration and anger are widespread among those who own no houses, while those who own multiple houses are crying foul over high real estate taxes,” said Chung, 63.
“The government is caught between the two sides.”
Mortgage rules for Seoul now cap borrowing at 40 per cent of the value of the home, a policy which critics say leaves only the “gold spoon” children of the wealthy able to snap up the best homes with their cash, leaving “dirt spoons” trapped as second-class citizens – fuelling the inequality Moon promised to tackle.
Pockets of the glitzy suburb of Gangnam are also subject to a transaction permit system, meaning sales without a permit can be made invalid if a purchase is considered “speculative”.
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House prices have also become a hot political issue, with the opposition United Future Party accusing Moon of incompetence, while his Democratic Party of Korea blames the past two conservative governments for inflating the real estate bubble by easing regulations and cutting taxes.
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In the midst of such quarrels, government officials have been told to sell off any extra houses they own and dozens of foreigners engaged in property speculation – including a US national and a Chinese student – are now being scrutinised for tax evasion.
Around half of the 5 million new housing units built in Seoul over the past decade were bought by people who already own a home, according to a Citizens’ Coalition for Economic Justice estimate – many of them for speculative purposes.
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For decades, landlords in South Korea, with its population of nearly 52 million, have operated the “jeonse” rental system, whereby tenants pay a deposit that can be more than half the home’s value instead of having to pay monthly rent.
This money can then be invested by landlords, who live off the interest before returning the entire deposit at the end of the lease.
But speculative landlords, taking advantage of cheap loans and the jeonse deposits they receive, have been using this pool of cash to buy multiple houses, which they then sell on after a number of years for handsome profits.
This is known as “gap investment”, in reference to the shortfall between jeonse deposits and a property’s market value, which speculators must make up out of their own pocket.
Construction Minister Kim Hyun-mee told parliament on Monday that some 60-70 per cent of housing units that changed hands in Seoul’s prosperous south over the past few months were for this type of gap investment.
Choi Pae-kun, an economics professor at Konkuk University, said that property taxes were too low in South Korea, causing investors in the country’s housing market to expect an “absurdly high” rate of return “10 to 40 times greater” than if they had invested in a manufacturing business, which he said was only serving to force prices ever higher.
In six months or so, we will likely see the new tax laws taking their toll
In a fresh bid to cool the market, the government on Tuesday unveiled a plan to build more than 130,000 homes in the capital area over the next eight years, while pushing through new laws that effectively double property tax for owners of multiple homes and raise stamp duty to a maximum of 12 per cent from the current 3.5 per cent.
Kim Tae-nyeon, head of the ruling Democratic Party, said the government was not going to repeat the mistakes of past administrations and “show the world things will be different”.
Choi, the economist, appeared cautiously optimistic that this time, the measures might work.
“In six months or so, we will likely see the new tax laws taking their toll” on owners of more than one property, who will “feel mounting pressure … and start selling their houses”, he said.
Additional reporting by Reuters
