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South Korea’s housing crisis a warning to other countries

“Secondplaying The house in 2021 is probably one of the biggest regrets of my life,” said Kim Myung-soo, 33, whose home in Jamsil, east of Seoul, has lost about $400,000 in value. His wife is 33 weeks pregnant, and Mr. Kim doesn’t know How he will pay the mortgage. He had planned to wait until the house price rose before selling the house to pay off the debt.

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Mr King is not alone. Across the rich world, housing markets look shaky. Few are as bad as Korea. House prices fell 2% in December alone, the biggest monthly drop since official data began in 2003. The plummet in apartment prices in Seoul has been particularly brutal: Prices are down 24% since their peak in October 2021.

The South Korean market gives us a glimpse of prospects elsewhere. Bank of Korea (Book) began raising rates in August 2021, seven months before the Fed and nearly a year before the ECB. The benchmark rate is now at 3.5%, a 14-year high, after officials raised it again in January.

The broader economy is feeling the strain. Private consumption fell by 0.4% in the fourth quarter of 2022. Exports, which fell 17% year-on-year in January, did little to soften the blow. They were hit by plunging semiconductor orders at the end of a pandemic-era electronics sales boom. This downturn will only add to the drag on house prices.

There are other sources of stress. Household debt will reach 206% of disposable income by 2021, well above even mortgage-loving Britain at 148%. About 60 percent of home loans in South Korea are on variable-rate loans, in stark contrast to the U.S., where most loans are fixed-term. As a result, household finances are squeezed faster when interest rates rise. The danger is that buyers like Mr Kim will become forced sellers – a situation he says he will try to avoid at all costs – meaning a collapse in house prices.

This risk is exacerbated by the country’s bizarre leasing system, known as handed down. Many tenants make huge one-off payments to landlords, usually 60-80% of property value, which are returned after two years. During this time, landlords are free to invest cash as they please. The system is a holdover from South Korea’s rapid industrialization, when mortgages were harder to come by.

During the downturn, some landlords were forced to fire sales to compensate tenants who left, and they lost money investing in risky assets, including more housing. Stories abound about the “Villa Kings” — owners of dozens of rental properties — who suddenly defaulted and disappeared.

South Korea also demonstrated how constrained monetary policy is by high household debt and asset prices.On whether the fragility of the housing market and the hit to household incomes will prevent Book further hikes.According to research firm Oxford Economics Book will continue. Nomura expects it to turn things around in May and cut its benchmark rate to 2% by the end of the year.

Most countries are not as exposed as South Korea. But some countries, including Australia, Canada, the Netherlands, Norway and Sweden, also face high household debt and frothy property prices. All started raising rates after Korea, and there are further hikes to come before the pressure passes. They are going through a difficult journey.

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