After the Gangnam Rally, Demand Shift to Outlying Areas Begins
After apartment prices rose in Gangnam's three districts (Gangnam, Seocho, Songpa) and along the Han River, a 'gap-filling' phenomenon is emerging, with demand shifting to relatively cheaper outlying areas. This reflects a narrowing of the wide price gaps between regions.
Gap-filling occurs when three conditions coincide. The first is a widening price gap between premium and lower-tier locations. When apartments in core areas rise by hundreds of millions of won in a short period, even buyers who max out their loans face a price barrier, and demand turns toward relatively affordable outskirts. The second is jeonse renters converting to purchases amid jeonse market instability. When jeonse listings shrink and jeonse prices rise, would-be renters without homes begin considering buying instead. The third is the liquidity and financial conditions that support the shift. Loan regulations are not a prerequisite, but when lending is restricted for popular areas or apartments above a certain price, borrowers move to regions and homes below the regulatory thresholds, redirecting the flow of money.
The 2006-2008 period is a representative example. On March 30, 2006, the government introduced a debt-to-income (DTI) ratio cap of 40% for apartments above 600 million won in designated speculation zones. According to the Korea Real Estate Board's apartment price index, apartment prices in the Gangnam area fell 7.32% in 2007-2008, while outlying districts such as Nowon, Dobong, and Gwanak surged an average of 30.74%. In Gyeonggi Province, while Gwacheon and Bundang dropped 18.53%, Uijeongbu and Ilsan rose an average of 26.45%. Although the Bank of Korea raised interest rates during this period, market liquidity remained abundant thanks to an export boom. The KOSPI crossed 2,000 points for the first time in July 2007, and equity fund assets grew more than 150% in a year, from 46 trillion won to 116 trillion won. Money flowed to areas where homes cost 600 million won or less and loans were relatively easy to obtain.
All three conditions were met again in 2020-2021. Under its December 16, 2019 measures, the government banned mortgage loans for apartments above 1.5 billion won in Seoul's designated overheated speculation districts and applied stricter LTV ratios to apartments above 900 million won. The Bank of Korea cut its base rate to a record low of 0.50% to counter COVID-19. The contract renewal rights system and jeonse price cap took effect in July 2020, and around that time, jeonse listings shrank and jeonse prices rose, sparking purchase demand among tenants. As renters who had been holding back jumped into the buying market, so-called 'panic buying' began.
According to the Korea Real Estate Board, from 2020 to 2021, Group 3 areas in Gyeonggi such as Suwon and Bucheon rose 35.72%, Group 2 areas such as Hanam and Gwangmyeong rose 32.30%, and outlying Gyeonggi areas such as Uijeongbu and Ilsan rose 28.41%. Nowon, Dobong, and Gwanak, which had gained only 4.84% in 2018-2019, rose 12.33% in 2020-2021. Both periods shared abundant market liquidity. Although the money was created differently, the outcome was the same: funds flowed into easily accessible areas, bypassing loan regulations.
In the two past episodes, areas with lower price gains did not simply rise in sequence; the widening price gap, jeonse instability, and liquidity had to converge. Gap-filling ended when the tide turned with the 2008 global financial crisis and the sharp rate hikes of 2022.
Since trading volume moves before prices, a rapid increase in transaction volume in outlying areas can be read as a signal of liquidity shifting. The price thresholds around which demand concentrated under loan regulations stood at 600 million won in 2006 and 1.5 billion won in 2019. Rising jeonse prices, which narrow the gap with purchase prices, were found to push more tenants toward home purchases. Jeonse listings for Seoul apartments are currently on a declining trend.
