Politics and the Polarity in the Korean Real Estate Markets

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Korea’s real estate market is spiraling out of control, and the staggering house prices in Seoul have spoiled the middle-class dreams President Moon once vowed to uphold in his inauguration. Moon implemented a series of seemingly remedial policies––notably higher taxes to curb real estate speculation––but the problem persists: prices have increased by more than 58% since 2017 and the median apartment price in Seoul as of January this year is 1.04 billion won (or $1.24 million). Inequalities have spiked in recent years, and the pursuit of home-ownership in Seoul is quickly becoming a far-fetched reality.

With less risk and a history of high returns, the flow of wealth towards real estate is among the most common investment practices in South Korea. Real estate investments are made possible by a unique jeonse rental system: the tenant places a deposit––typically around 70% home’s market value––for the lease duration, and the landlord returns the entire deposit at the end of the lease interest-free. The landlord uses the interest-free, borrowed deposit for investments, thereby generating profit. 

The practice known as ‘gap investment’ that cleverly generates returns based on the jeonse system has become an enterprising process for landlords. For example, a landlord could buy a condominium worth $450,000 with $150,000 through a prior deal with a renter who would put down $300,000 in deposit. Accounting for Seoul’s approximate rate of appreciation, the landlord could sell the condo two years later for almost $600,000. After paying back the deposit to the renter and subtracting the initial investment, the landlord profits $150,000. Recently, Seoul has seen a rise in landlords seeking to capitalize on the distinctive real estate contract system. 

Aggressive gap investments create an incredibly vulnerable and unregulated financial ecosystem whereby a downturn in the real estate market and a landlord’s bankruptcy could immediately wipe out millions in jeonse deposits. Gap investment would thus act as a harbinger to higher prices of real estate. The central bank’s response to COVID-19 with an unusually low-interest rate has only exacerbated the practice, increasing capital flow into assets and driving prices upward. 

The surge in house prices has also pushed young, first-time job holders out of the city with ensuing burdens such as transportation costs and loans for inflated jeonse deposits. After earning a majority in the April parliamentary elections, the Moon administration and Democratic Party have announced a host of laws concerning the real estate market. The revisions raised taxes for non-residential real estate investors, restrained gap investment to remove excess liquidity, and devised strategies to divert the flow of cash away from real estate, such as the “New Deal Fund” which promotes investment for governmental projects. 

The ambitious goal to offer affordable housing has ushered in punitive taxation and regulatory measures as President Moon’s foremost real estate policy prescription, but they have failed to materialize. This failure is rather unsurprising as it defies the very basic market principles of supply and demand. The government’s relentless attempts to decrease demand for homes have not been supplemented by an increased supply of houses, distorting the market with frozen trade and fueling increases in long-term house prices. In addition, the massive flow of liquidity into the real estate market in tandem with continued low-interest rates would indubitably cause a housing market bubble.

Yonsei University Economist Taeyun Sung has voiced a more “market-friendly” approach in controlling supply and demand in lieu of the pre-existing regulation-centric real estate policies. The current set of regulations and its de facto implications pertain to the inability to obtain mortgages. The government has supported the steps as necessary to bring stability to a market shaken by speculators. Sung has repeatedly refuted this policy as young people living in rented apartments cannot purchase their own homes. A tighter mortgage policy with lower loan-to-value ratios is a contributor to higher rents. The very citizens the government has promised to protect are now falling victim to the real estate policies. 

Despite the Ministry of Economy and Finance stating their intent to supply more than 830,000 housing units by raising height restrictions and the maximum floor area ratio, Moon faces a ‘third rail’ political issue hindering the practical realization of the proposals. Lowering the wealth tied to a significant portion of Korean households has proven to be difficult to overcome politically. Politics and electoral interests are at the centrality of the real estate crisis.

With political endeavors taking precedence, President Moon is receiving criticism for playing a game of short-term populous politics––continually exploiting housing policies as a means to rally supporters. Several liberal lawmakers have also been accused of owning multiple homes, shedding light on double standards within the government. A hot mic moment caught Democratic Party assembly member Jin Seong-jun claiming that “house prices are not going to fall,” after a debate arguing in favor of government policies. 

Buying a house has become an extremely stressful process for South Koreans, especially in Seoul––the epicenter of business, education, and multicultural diversity. Residential ownership has never been easy in the capital city, but the prospect of starting a family in a stable household has become even more elusive under the Moon administration. In 2021, South Korea’s population fell for the first time in history with a crude birth rate of 0.84. It is of utmost importance that the administration act in the interest of middle-income families––particularly those who fail to qualify for public rental housing. President Moon must swiftly adopt an easing of real estate regulations while simultaneously endorsing policies to increase the supply of affordable housing in and around Seoul.

 Moon’s approval rating has recently dipped significantly from 71% to 39%––the lowest of his presidency. While the Korean housing market’s trajectory is hard to predict, we know Moon’s future housing policies may make or break the legacy of his presidency. More importantly, the next generation’s prospect of life in Korea is in the hands of policymakers and President Moon.

Jason Park is a staff writer for CPR and a first-year student in the Dual BA Program with Sciences Po, studying Economics and Political Science.