Loan regulations fail to stabilize Seoul housing prices

Stringent loan regulations in Seoul have inadvertently accelerated price surges in mid-tier apartment markets by pushing demand toward properties priced around 1 billion won. This shift, combined with rising rental costs as suppressed buyers move into Jeonse and monthly rent markets, creates a cycle that prevents long-term price stabilization.

Why do Seoul housing prices remain difficult to stabilize even when the government tightens loan regulations and restricts transactions through the Land Transaction Permit System? It is because regulations have produced "paradoxical results," such as pushing demand into specific price ranges or increasing instability in the Jeonse and monthly rent markets.

According to an analysis by Director Lee Seung-hun reported by KB Real Estate TV, recent stringent loan regulations have actually accelerated the concentration of demand in Seoul's mid-to-low priced apartment market. As loan limits are applied differentially based on price ranges, buyers with sufficient capital—unable to cross the high price thresholds of premium areas—have moved to apartments priced around 1 billion won that fall within the regulatory limits. Consequently, demand from premium areas has moved down to mid-tier areas, inducing rapid price increases. "As these measures are introduced when prices rise in premium areas and move to mid-tier areas, they cause people to gather more quickly, which became a cause for prices to surge," Lee analyzed. "It caused prices that would have risen slowly to rise sharply and surge."

Side Effects of Loan Regulations Push Sales Demand into Rental Markets

The reason loan regulations appear to curb housing prices is only temporary. Lee explains that while tightening loans may create an immediate effect where the buying momentum slows and prices stagnate, this cannot be a fundamental solution. This is because buyers who planned to purchase homes but are unable to do so due to loan restrictions eventually drift into the Jeonse or monthly rent markets.

"If sales demand is suppressed, Jeonse and monthly rent demand will concentrate, leading to an increase in Jeonse and monthly rent prices," Lee pointed out. When rental prices rise, rental yields eventually increase, creating a repetitive structure that pushes up sales prices again. He analyzed that the market trend over the past four to five years has followed this exact path. In particular, the fact that the proportion of monthly rentals has exceeded half due to recent Jeonse fraud issues and the aftermath of high interest rates is a snapshot of this market instability. Lee added, "If you kill sales demand, it looks like prices are caught temporarily, but because of that, Jeonse and monthly rent prices rise, which ultimately results in a structure where sales prices go up."

The situation for non-homeowners is worsening. Non-homeowners who lacked funds or delayed purchases in anticipation of a market decline are bearing the full brunt of rising Jeonse and monthly rent burdens. "Those who had the financial capacity but did not buy because they judged that real estate prices would fall must continue to endure rising Jeonse and monthly rent," Lee said. "Recently, an unfortunate situation has occurred where people want to buy homes due to loan regulations but are unable to do so." The preference for monthly rentals is likely to intensify, especially as discussions regarding restrictions on Jeonse loans for single-home owners who do not reside in their properties are underway for next year.

"Supply is the Only Answer"... Redevelopment and Reconstruction Blocked by Political Burdens

Lee identified "expanding supply" as the only fundamental measure to stabilize the real estate market. For Seoul in particular, he maintains that supply through reconstruction and redevelopment—which increases the height of existing buildings—is essential rather than developing new residential land. "To provide actual supply in Seoul, redevelopment and reconstruction must be revitalized," he said. "However, the reality is that the government cannot easily step forward due to the political burden that loosening redevelopment and reconstruction could cause housing prices to rise during their term." He explained that due to the nature of South Korea's five-year single-term presidency, the price increase brought by deregulation acts as a political risk during the term of office.

He also pointed out that the public-led supply being pursued by the government has limitations in terms of speed. Unlike private methods, public-led initiatives face difficulties in coordinating interests with residents during the land compensation process, which takes a long time. "The public sector may be fast with permits, but because there are property rights issues with residents during the land compensation process, it can become as difficult as private supply if things do not proceed as expected," Lee said. Ultimately, while easing regulations on private redevelopment and reconstruction to boost supply capacity is the key task for market stability, this is an area requiring political decision-making.

'Small-scale Investment' Strategy Targeting Villa Redevelopment and Location Analysis

Amidst uncertain market trends, Lee focused on the villa redevelopment market, which he believes will be the core of future supply. Utilizing the fact that the difference in investment amounts for villas is not large compared to apartments, he suggested a strategy of purchasing villas in the early stages of redevelopment in areas with high potential to become apartment complexes in the future. "While reconstruction is already being carried out on a large scale with little additional net increase, redevelopment—where villas are demolished to build apartments—is a practical way to solve the housing shortage in Seoul," Lee said.

To reduce risk when investing, Lee stated that he prefers the "early stages" rather than areas where the business stages have already progressed. While the investment amount increases and risk decreases as the stage of progress rises, the early stages are advantageous in terms of profitability. Specifically, he explained that he keeps in mind stages before a promotion committee is even formed, such as the "serial number assignment" stage where residents hold general meetings for discussion or collect consent forms. "Ultimately, I target the early stages to invest small amounts with the perspective that it will inevitably happen," he stated.

The criteria for promising areas align with the apartment market. "You should keep an eye on villas in areas where surrounding apartment prices are high, such as Gangnam, Songpa, Yongsan, Mapo, and Seongdong," Lee advised. "There is no need to go to the outskirts; a strategy with a high win rate is to find properties that fit your funds in core locations and wait." He emphasized that it is important to have the know-how to select areas expected to yield profits, such as Songpa, Yongsan, the Han River line, Mapo, and Seongdong, rather than areas like Gangnam or Seocho, where reconstruction-centered movements are expected to take a long time.

Source: original video (YouTube)