Housing policies lose momentum

Analysts are warning of a supply cliff in the housing market next year. Recently, the Construction and Economy Research Institute of Korea (CERIK) estimated that the decline in apartment construction supply in the Seoul metropolitan area, which began in 2022, will have an impact in earnest starting next year. This projection is based on the fact that it takes about three years from the start of construction to completion or move-in. The institute noted that apartment completions in the Seoul metropolitan area averaged 156,000 units annually from 2005 to 2023 but are expected to fall below this average next year. This is due to the decline in apartment construction, which stood at 140,000 units in 2022 and 100,000 units last year. While the number slightly recovered to 112,880 units from January to October this year, it remains insufficient.

The overall environment surrounding supply is not favorable. Even though the U.S. benchmark interest rate has been reduced by one percentage point this year, it remains high at 4.25–4.50% annually. Furthermore, the Federal Reserve (Fed) is expected to lower the number of rate cuts next year from four to two. High interest rates make it more difficult for builders to secure financing and dampen demand for home purchases. As a result, both supply and demand decline together, creating a vicious cycle.

The exchange rate is also a concern. On Thursday and Friday, the won-dollar exchange rate exceeded 1,450 won during daytime trading, marking the first time in more than 15 years and nine months since the global financial crisis. With the exchange rate soaring, it becomes difficult for the Bank of Korea to lower the benchmark interest rate, even if the U.S. reduces its rate. Furthermore, as the construction industry depends heavily on imports for a significant portion of its raw materials, a rising exchange rate directly leads to higher construction costs. This makes redevelopment and reconstruction projects—key methods of supplying housing in urban centers—less feasible.

Policies and legislation aimed at revitalizing the housing supply have lost momentum under these circumstances. It is uncertain how long the vegetative state of the government, caused by the aftermath of martial law, will persist, while the National Assembly has effectively come to a standstill due to political conflict between the ruling and opposition parties.

The opposition party's stance against abolishing the reconstruction excess profits tax suggests that its continuation is a foregone conclusion. This implies that a key incentive to enhance business feasibility for housing partnership members has effectively vanished. Additionally, the 'Reconstruction and Redevelopment Special Law,' intended to expedite projects by reducing the number of maintenance stages, is unlikely to pass the National Assembly. This is mainly because the government opted to enact a special law, which appeared more favorable when announcing measures, rather than amending existing laws—a choice that might have faced less opposition from the opposing party.

It is unclear whether the reconstruction projects in the prime districts of the first-generation new towns, which were supposed to begin in 2027—the last year of Yoon's term—will proceed as planned. There is also uncertainty regarding the supply of 50,000 new housing units through the lifting of development restrictions in areas such as the Seoripul District in Seocho-gu, Seoul, as well as the designation of 30,000 new housing sites in the metropolitan area in the first half of next year.

After all, another ‘house price spike’ like this summer's could occur anytime. For now, lending has been artificially tightened to temporarily ease the situation. However, if demand is stimulated by the resumption of mortgage lending in the new year, there is a risk that metropolitan areas—particularly Seoul, and especially Gangnam District—will continue the so-called ‘owning a single expensive house’ trend. Households may rush to buy, reducing their disposable income. With unsold rural properties still unresolved, there is little hope that rising real estate prices will create a virtuous cycle of construction jobs and increased domestic demand. What is particularly concerning is that the downturn in state-driven momentum this year and next year could dominate the real estate market for years to come.