--- title: 'Korean Real Estate Outlook: Lease Deposit × Interest Rate' category: realestate tags: - real estate published: true date: 2025-09-21 12:02:20 description: 'Housing prices are lease-deposit growth times the multiple interest rates set. A permitting cliff, more demolitions, and rate normalization now turn both axes one way.' --- **Korean housing prices are determined by the product of the structural trend of the "lump-sum deposit lease" and the multiple, the market's valuation yardstick that is the "interest rate."** The market is now entering a phase of very large potential volatility and upward pressure, a historically rare one in which the intrinsic-value-boosting engine driven by supply scarcity and the multiple engine of expectations for interest-rate normalization can be ignited at the same time. This piece draws on the insights of Shin Seong-cheol. ------------------------------------------------------------------------ The debate around the real-estate market is always heated. Countless variables (policy, sentiment, demographics, and so on) are raised in a cacophony of competing voices, but a clear analytical framework that penetrates the market's fundamental operating principles is hard to find. To untangle these knotted threads, we have to step back from the "sale price," which is the result of the phenomenon, and understand the essential function that moves that price. I believe we can finally see the market's flow only when we interpret the universal formula for all asset prices, namely **"price = growth × multiple"**, in a way tailored to the particularities of the Korean real-estate market. # **1. The "Deposit-Lease-to-Sale" Two-Stage Circuit** The price of every asset is the product of the "growth" of future value and the "multiple" that shows how much that value is priced at in the present. This will be familiar from the stock market, where it appears as the relationship between a company's earnings outlook (growth) and its price-earnings ratio (PER, the multiple). What sets the Korean real-estate market apart is that a powerful parameter, the **"lump-sum deposit lease system"**, exists within this universalized formula. The essential value that housing generates, namely its **"rental value,"** shows up as a lease deposit or monthly rent. Of the two, the lease deposit is the most important variable (proxy) standing in for the cash flow of housing as a real asset. In other words, just as net profit does for a company, the "lease deposit price" serves as the practical benchmark for the intrinsic value of housing. The sale price expands or contracts as external factors such as liquidity, market sentiment, and leverage layer on top of that fundamental, the lease deposit. The indicator that captures the relationship between the two is the "lease-deposit-to-price ratio (lease deposit / sale price)." Typically, once it crosses the critical band of around **60% in the metropolitan area and 75% in the provinces**, the co-movement phenomenon, in which a rise in the lease deposit directly pushes up the sale price, begins in earnest. ------------------------------------------------------------------------ # **2. The Axis of Rising Lease Deposits: "Supply"** Where does the force behind rising lease deposits come from? It's "supply and demand." We commonly look at demand and supply together, but their influence on price changes depends on the size of each variable's "volatility." **Demand, based on the number of households, is close to a constant that changes slowly and gently, like the demographic structure.** In practical terms, the population and its structure change gradually but do not shift abruptly. By contrast, **the supply cycle, running from permits to construction start to move-in to demolition, is a highly volatile variable that concentrates at particular times or plummets.** The market's common sense here is clear. The side with the far greater range of fluctuation holds the key to price determination. It works the same way with rice. In a country that consumes a similar amount each year, what determines the price of rice is not demographic change but **the supply variable of bumper and lean harvests.** So the long-term trend of lease deposits, that is, the "growth" of real estate, is **overwhelmingly determined by the supply side.** What is especially worth watching is the gap between the metropolitan area and the provinces. In the provinces, lease deposits and sale prices tend to move relatively in tandem, but in the metropolitan area, where abundant liquidity and investment demand converge, the market plays a kind of "amplifier" role. In upswings, the rate of increase in sale prices is far steeper than that of lease deposits, and in downswings, the drop is likewise deeper. Looking out over roughly the next five years, the already-fixed permitting cliff and the rising demolition volume from reconstruction and redevelopment point to a clear supply shortage. On top of that, around **2028, when the "new move-ins \< demolitions" structure of the first-phase new towns intensifies,** upward pressure looks highly likely as a structural supply shortage strongly stimulates the lease-deposit market. ------------------------------------------------------------------------ # **3. The Axis of the Multiple: "Interest Rates"** If the rise in lease deposits determines the direction, the multiple regulates its speed. The key variable that sets the multiple in the real-estate market is the **"interest rate."** That's because the interest rate is the sole benchmark by which a tenant judges whether a lease deposit or monthly rent is more economical. - **Benchmark for lease-deposit cost:** the lease-deposit loan rate (or the opportunity cost of one's own capital) - **Benchmark for monthly-rent cost:** the deposit-to-monthly-rent conversion rate (the rate for converting a lease deposit into monthly rent) Historically, the deposit-to-monthly-rent conversion rate has tended to converge toward market interest rates. When rates rise, the burden of loan interest grows, so tenants lean toward monthly rent and lease-deposit demand declines (lease deposits fall). That is, **the market's multiple contracts.** Conversely, when rates fall, the lease deposit becomes advantageous, demand converges on it, lease deposits rebound, and **the multiple of the sale market also expands.** The sharp contraction of the lease-deposit market after the 2022 Legoland incident, as loan rates soared to the 7% range, is the most dramatic example of this mechanism at work. Let's put the power of this multiple in concrete numbers. All else being equal, **if the deposit-to-monthly-rent conversion rate falls 1 percentage point from 5% to 4%, the multiple the market applies rises by a full 25%, from 20x (1/0.05) to 25x (1/0.04).** ### For example, say a fish-shaped-pastry shop earns **100 million won** in net profit per year. #### **Situation 1: A Multiple of 20x (Deposit-to-Monthly-Rent Conversion Rate of 5%)** - Because the market is a bit uneasy, people think, "I'd buy this fish-shaped-pastry shop for about **20 years' worth of net profit.**" - What is the shop's price then? 100 million won × **20x** = **2 billion won** - This is simply what a **multiple of 20x** means. (A 2-billion-won shop earns 100 million a year, so the yield is 5%.) #### **Situation 2: A Multiple of 25x (Deposit-to-Monthly-Rent Conversion Rate of 4%)** - But as rates fall and the market mood improves, people raise their expectations: "In times like these, you've got to pay **25 years' worth of net profit** to buy it!" - What is the shop's price then? 100 million won × **25x** = **2.5 billion won** - **Even though the shop's net profit (the lease deposit) is unchanged**, merely because the market's valuation (the multiple) changed, the shop's price jumps by a whopping **500 million won (25%).** If the lease deposit itself (growth) also rises 10% along the way because of a supply shortage, the effect on the final sale price is not a simple sum (25% + 10%) but a nonlinear, explosive force from multiplying them (1.25 × 1.1). Back to the fish-shaped-pastry shop: suppose business is so good that the shop's annual net profit (the lease deposit) rises 10%, **from 100 million won to 110 million won**. If the market mood is also good, a **"multiple of 25x"** situation, what will the final price be? - **New net profit (110 million won) × new multiple (25x) = 2.75 billion won** The upshot is that when rising lease deposits and falling interest rates happen at the same time, real-estate prices can jump far more than expected. ------------------------------------------------------------------------ # **4. The Current Phase: Two Wheels Rolling in the Same Direction** The Korean real-estate market works like a system in which two enormous gears (the "value-boosting driver" led by supply and the "market multiple" regulated by interest rates) mesh and turn together. And right now, we are meeting a critical, historically rare inflection point at which these two gears simultaneously generate powerful rotational force in one direction. 1. **Rising lease deposits:** The sluggish permitting of the past several years and the urban demolition volume that will begin in earnest going forward are creating structural upward pressure on lease deposits in the form of a "supply shortage." 2. **Interest rates:** The peak of the global tightening cycle has passed, and the market is leaving open the possibility of a mid-to-long-term interest-rate "normalization (decline)." This is highly likely to expand the multiple. A single factor alone is enough to move the market, yet times when two key drivers simultaneously apply powerful force in one direction are rare. I believe this could tip the market's balance to one side and send prices overshooting over the coming years. Especially in the metropolitan area, where investment demand is so concentrated, this could be amplified further. You can already hear the gears of change turning, and it seems there is not much time to choose whether to seize the opportunity atop this enormous flow or to sit back and watch. I am very curious what the real-estate market will look like when I look back on this piece at least five years from now.