This blog post calmly examines why apartments in South Korea are treated like financial products beyond mere living spaces, and the structure created by loans, policies, and psychology.
How on earth can you afford to buy an apartment?
An apartment is the most expensive asset an average person can purchase. Moreover, since housing prices aren’t included in the consumer price index, no matter how drastically they fluctuate, it’s difficult to truly grasp their level based solely on the government’s official CPI. Given the sheer scale of housing prices, there’s also concern that including them in the index could distort the indicator itself. Regardless, if someone actually possesses enough cash or funds to purchase the most expensive item one buys in a lifetime outright, that would be the real oddity. Common sense dictates that borrowing money is the only way to buy an apartment.
Financial institutions, including banks, lend money. Banks won’t just hand over money unconditionally, saying, “You’ve worked hard, so please use this money to buy a home,” based solely on the borrower’s good intentions. Both the borrower and the lender must meet each other’s necessary conditions. The financial product created to address this need is the mortgage loan.
I can’t buy an apartment with my own money
A mortgage is a way to borrow money on the condition that if the borrower fails to repay the loan, they transfer the right to dispose of their home to the bank. If the borrower defaults on the promised repayment, the bank auctions off the mortgaged property to a third party and uses the proceeds to recover the unpaid loan amount.
“Household debt hits record high in Q3… Mortgage growth slows amid falling home prices” (Seoul Shinmun, Nov. 23, 2022)
While apartment purchases are broadly categorized as buying a new apartment off-plan or purchasing an existing apartment, loans are nearly unavoidable regardless of the method chosen. Therefore, examining the trend of mortgage loan growth can indicate whether the real estate market is in an active phase or entering a downturn. As expectations for rising home prices increase, people purchase more apartments, leading to an expansion in mortgage loan volume. Conversely, when stagnant or falling home prices are anticipated, buying sentiment weakens, and mortgage loans also tend to decrease.
However, the growth trend of mortgage loans does not always perfectly align with the flow of the real estate market. This is because additional loans are sometimes taken out not for apartment purchases, but to cover living expenses or repay existing loans.
Looking at the headline of the article mentioned earlier, while total household debt has accumulated to an all-time high, the growth rate of mortgage loans—which constitute the largest portion of household debt—has shown signs of slowing for some time. This suggests that the market atmosphere, once characterized by so-called ‘all-in’ borrowing—where people scraped together every last penny to buy a home—has passed its peak and entered a somewhat calmer phase. The direct cause cited for this is the decline in home prices. However, the slowdown in mortgage loan growth does not mean the overall risk of household debt has been resolved. This is because other loan burdens on the household sector remain at levels that are still cause for concern.
The real estate bubble is particularly frightening because loans are, ultimately, debts that must be repaid. If the borrower loses their repayment capacity, the burden shifts to other entities. The first to bear responsibility is the lending bank. While banks attempt to recover the loan by disposing of the apartment secured as collateral, the value of the collateral itself plummets sharply when the real estate bubble bursts. In such cases, even selling the property may not fully recover the loaned amount.
Banks holding large quantities of such devalued collateral assets inevitably face significant instability in their operations. If banks become insolvent in a chain reaction, leading to a situation where no one can service their debts, the government ultimately steps in to cover the losses using taxpayer money. This is precisely why the government closely monitors the scale and trends of mortgage loans.
“‘I regret buying a house with all my savings’… 2030s falling into poverty” (The Korea Economic Daily, November 3, 2022)
This article starkly reveals the atmosphere of the South Korean real estate market at the time. During the housing price surge, articles advocating ‘jumping on the bandwagon even if it means taking risks’ appeared far more frequently than those warning of dangers. Despite rapidly increasing household debt, sensationalist terms like ‘sudden poverty’ fueled anxiety and a sense of crisis, driving the fear of ‘being left behind.’ However, as the real estate market shifted into a downturn, people now face the fear of potentially becoming truly ‘impoverished’.
If the primary indicator of real estate market health is the new home sales market, then the fluctuation of mortgage loans can be considered the secondary indicator. The scale of loans generally moves in tandem with real estate transaction volume. When transaction volume increases, loans also rise; when transaction volume decreases, the total loan amount typically follows suit.
Nevertheless, the reason many people bear the heavy burden of loans to purchase apartments is clear. It stems from a strong belief that even if they incur debt and pay interest, as long as home prices rise, they will ultimately profit. This belief has been deeply ingrained throughout Korean society over a long period. While younger generations tend to judge based on indicators and figures rather than belief, this faith often strengthens after experiencing the market several times.
However, as loan interest rates rise while home prices show little sign of increasing, those with relatively lower incomes—specifically those in their 20s and 30s—are hitting their limits first. Crises always begin at the weakest point. Regionally, signs appear first in the provinces; generationally, among those in their 20s and 30s; and in the financial sector, within the secondary financial institutions. Nevertheless, if the real estate market in South Korea manages to weather the storm and re-enter an upward trend, it remains primed to flare up again at any moment.
What to know before reading real estate articles
“Lifting of regulated zones and eased lending contribute to soft landing… but insufficient to restore buying sentiment” (Yonhap News, Nov. 10, 2022)
Unless there is a fundamental shift in population structure and social structure, it seems unlikely that Korean society’s perspective on apartments will change anytime soon. Today, middle-aged Koreans have two major life partners. One is their spouse, bound by marriage, and the other is the bank, bound by debt. While home ownership is shared with a spouse, when a home is acquired through a loan, it effectively becomes co-owned with the bank. Thus, real estate extends beyond being a family’s living space; it is deeply intertwined with household finances and the broader financial system. This is why it possesses the potential to shake not just individual households but the entire national economy. This is precisely why one should consistently pay attention to real estate-related news articles.
Particular attention is needed when terms like ‘regulation’ or ‘policy’ appear in real estate articles. While real estate regulations and policies may seem to have little immediate impact on the market, they exert significant influence over the long term. Consequently, headlines often feature phrases like ‘minimal effect’ or ‘market shows no reaction,’ yet these measures frequently lead to clear changes over time, even if not immediately apparent.
Representative real estate regulations include regional restrictions and loan restrictions. Regional restrictions encompass ‘adjustment target zones’ and ‘speculative overheating districts’. Designation as an adjustment target zone imposes restrictions on subscription, loans, and resale, along with higher taxes. Speculative overheating districts face even stricter limitations. Not only are the regulations complex, but the specific criteria and designated areas frequently change based on the real estate market conditions. Therefore, anyone interested in real estate must continuously check for the latest information.
Loan regulations include DTI (Debt-to-Income Ratio), LTV (Loan-to-Value Ratio), and DSR (Debt Service Ratio). Among these, LTV is an indicator showing how much of a loan can be obtained relative to the value of the real estate provided as collateral. For example, if the price of an apartment pledged as collateral is 1 billion won and the LTV is 70%, a maximum loan of 700 million won can be obtained. DSR is a more stringent concept than DTI, representing the ratio of annual loan principal and interest repayments to annual income. For instance, if your annual salary is 40 million won and your DSR is 50%, the total principal and interest repayments per year cannot exceed 20 million won.
One reason mortgage terms are extending to 40 or 50 years is precisely related to this DSR regulation. Longer loan periods reduce the annual repayment amount, allowing lenders to meet DSR standards while extending larger loan amounts. Since loan regulation details frequently change and calculations are complex, using online or mobile app loan calculators offers practical assistance.
While understanding the precise meaning of each term is important, what matters most is discerning the overall direction of real estate policy. When terms related to regulations or policies include the word ‘tightening,’ it can be interpreted as an intent to control and stabilize the market. Conversely, when the word ‘loosening’ is used, it can be understood as an intention to reactivate a stagnant market. However, it’s also important to remember that, contrary to the government’s policy intentions, the real estate market often reacts more clearly after some time has passed, rather than immediately following the announcement of regulations. If you buy a house immediately upon news of regulatory easing, or sell a house the moment an announcement of regulatory tightening is made, you may actually face results different from what you expected. Keeping this point in mind is paramount when reading real estate articles.
