why Seoul's rising housing prices go beyond the supply shortage theory

why the supply shortage theory is wrong

despite the government's strong real estate regulations such as the Land Transaction Permit Zone and speculative hotspot designation, the market hasn't cooled down. while transaction volumes have dropped, the shortage theory is not enough to explain why Seoul prices are rising.

if a lack of supply is the cause of rising prices, then rental prices should be rising as well, as rentals are a reflection of residential demand. However, over the past two to three years, sales prices have been rising at an overwhelmingly steeper rate than rental prices, and the gap between rental and sales prices has widened, especially in Gangnam.

at the end of the day, the key to rebutting the lack of supply argument is simple. it's that the rental market, which is a proxy for residential demand, is not as overheated as the sales market. the reason for Seoul's rising prices lies elsewhere.

asset parking demand drives Gangnam apartment prices

behind the rising prices of Gangnam apartments is the demand for asset parking. most apartments in Gangnam are priced above 2.5 billion won, with only 200 million won in loans available. asset parking is the reason why demand is not dampened despite having to pay almost all cash for a home.

asset parking is a strategy of securing safe assets in advance, just like putting gold in a chest. in Korea, there's a strong belief that a house is a very safe asset, and it's the safest asset that's likely to go up. there is a psychology that even if the price of an apartment drops by 5%, it will still go up at some point.

in particular, apartments in high-end neighborhoods in Gangnam haven't dropped in more than two years, with newly constructed luxury apartments fetching higher prices than expected after completion, and even those that are about to be reconstructed have seen a surge. this is a reason to be optimistic about the outlook for Gangnam prices.

cash value decline and the embracing rally

to understand why Seoul prices are rising, we need to look at the phenomenon of cash value decline. In the current market, there is a growing belief that cash is trash. this is not just a Korean phenomenon.

both domestically and internationally, the massive release of liquidity is driving a real estate everything rally. risky and safe assets alike are soaring in price. on the flip side, the value of currencies is falling sharply.

with the possibility of additional liquidity in the future, there is a growing concern that sitting on the sidelines will make you a lightning rod. i need to buy an asset, and my options are narrowing down to apartments, especially in Gangnam, because while stocks are going up, I'm nervous about the potential for losses.

gap-filling market and the outlook for mid- to low-range housing prices

going forward, we expect a gap-filling market rather than a polarization. gap-filling is a phenomenon where prices are rising in the lower- and middle-range neighborhoods that have been underperforming. it is a phenomenon in which prices increase in the upper end of the market, making the middle and lower end of the market seem cheaper.

we are already seeing signs of this in the second half of the year. some mid- and low-end neighborhoods have maintained their 2018-19 prices, even though Seoul residents' incomes have risen by more than 20% since then. this is the background for the analysis that it's only a matter of time before prices rise in the mid- to low-range areas.

the outlook for prices along the Nodogang River is also in the spotlight. the combination of tight supply, fewer rental properties due to the land transaction permit system, and differentiated lending regulations could push demand to less expensive areas like Nodogang.

how interest rates and global variables affect home prices

the relationship between interest rates and house prices is an essential variable when analyzing the reasons for Seoul's rising prices. currently, Korea's economic growth rate is slowly increasing, with global investment banks predicting growth in the 2% range.

the profitability of the semiconductor industry is improving, and inflation is steadily rising in the 2% range. considering the exchange rate, it is difficult to lower interest rates. the limited effectiveness of real estate regulations is also dampening expectations for rate cuts.

furthermore, if the global asset market rally ends, the real estate market could face strong downward pressure. interest rates and the end of the global asset rally are the key variables to watch for house price declines.

frequently asked questions

Q1. Isn't the reason for Seoul's rising prices really due to a lack of supply?

A1. If there is a shortage of supply, then rental prices should be rising as well. However, sales prices have overwhelmingly outpaced rental prices over the past two to three years, indicating that asset parking demand is driving up prices more than residential demand.

Q2. What is asset parking demand?

A: Asset parking is an investment strategy that allows you to store safe assets in advance, much like storing gold in a safe deposit box. it's a way to tie up cash in assets that are likely to go up when you're worried about the value of your cash falling.

Q3. Will lower- and mid-range homes go up?

A3. We expect a gap-filling market. as upper-end prices rise, mid- and lower-end properties may become relatively affordable, shifting demand to areas like Nodogang.

Q4. Is there any possibility of house prices falling?

A4. The difficulty in lowering interest rates and the end of the global asset rally could be a downside factor for home prices. however, as long as concerns about declining cash values persist, a sharp decline is likely to be limited.

conclusion

seoul's rising prices are not driven by a lack of supply, but rather by demand for asset parking and concerns about declining cash values. Going forward, the market is likely to be a gap-filling market, with mid-to-low-end prices likely to rise as well.

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