[ANALYSIS] Will home price bubble burst?

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Burden of mortgage repayment hits 11-year high for Seoul apartment owners

By Lee Kyung-min

Home prices in Korea are unlikely to decline any time soon, due to the combination of cheap borrowing costs and panic-driven buying, sustained by the abject failure of the government's 24 rounds of botched real estate policies that ignored the realities of supply and demand.

According to November data from the Citizens' Coalition for Economic Justice (CCEJ), a left-leaning civic group, prices of apartments in Seoul climbed 58 percent over the past three years. This is a further increase from its July assessment where it said the jump in the period was 314 million won, or 52 percent, more than double the 134 million won during the term of President Park Geun-hye between 2013 and 2017.

The steady rise of home prices came despite the 24 frantic attempts to control what should be ruled by the market principle of supply and demand, a reaction to anxiety-driven panic buying that ensures further distortion of the market already experiencing liquidity overflow amid a record-low borrowing rate, according to Seoul National University economist Kim So-young.

"The government has repeatedly vowed 'the strongest measures yet,' in a desperate push to stem property speculation, and the refusal to acknowledge shortcomings of their repeated failed measures that ignored market principles led to greater anxiety," he said.

Also enabling the borrowing is a record low interest rate, coupled with a massive stimulus package in the coming months to help the country weather the pandemic.

"People are more inclined to borrow money given the current record-low interest. Some need the cheap money to buy homes while others use it to profit on the volatile stock market," he said.

Liquidity

The assessment is strengthened as illustrated by the increase in demand for investment that came amid increased liquidity in the money market, notably what is categorized as M1, a measure of money supply alongside M2.

M1 includes highly liquid financial instruments including cash, checkable deposits and traveler's checks, whereas M2 money supply encompasses M1 plus assets with lower liquidity such as savings, certificates of deposit and money market funds.

Bank of Korea data released Dec. 15 showed M2 reached 3,150.5 trillion won in October, up 34.7 trillion won, or 1.1 percent from the month before.

This was a 9.7 percent jump year-on-year, and the second sharpest month-on-month increase after May's 35.4 trillion won increase, since the central bank began compiling related statistics.

The total M2 held by households and non-profit organizations increased 18.5 trillion won in October, with the month-on-month increase being the steepest in 14 years and four months since June 2006 when the figure was 21.1 trillion won.

The M2 held by companies and other financial institutions jumped 10.7 trillion won and 9.8 trillion won, respectively. The currency increase was most pronounced in money trusts and foreign currency deposits held for less than two years, a spike in borrowing fueled by the central bank's key rate cut to 0.5 percent in May.

Meanwhile, the M1 also rose 1.5 percent in October hitting an all-time high of 1135.2 trillion won. The year-on-year increase of 27.8 percent was the highest since May 2002 when it was 28.4 percent.

Mortgage burden

The burden of mortgage repayments hit an 11-year high for Seoul apartment owners, as indicated by a related index compiled by the Korea Housing Finance Research Institute affiliated with the Korea Housing Finance Corp.

The data showed Seoul's housing purchase burden index rose to 144.5, up 1.7 points in the third quarter of 2020 year-on-year.

This is the highest level in 11 years since the fourth quarter of 2009 when the figure hit 150.8.

The index measures how median income households bear the burden of paying back principal and interest following a mortgage taken out to purchase mid-priced homes.

An index of 100 means that about 25 percent of the household income is spent on repaying the principal and interest on a mortgage. The higher the number, the greater the burden of debt repayment.

The index has been steadily rising since the October-December period of 2016 when it reached 100.

The uptrend showed signs of inching down in the January-June period of 2019, but has since continued upward for four consecutive quarters.

The figure for homes nationwide also climbed to 52.3, continuing its uptrend for a third consecutive quarter, with the prices of both sales and jeonse increasing. Unique to Korea jeonse is a home renting system whereby renters pay a refundable lump sum instead of monthly rent.

Excluding Sejong, the quarter-on-quarter increase was sharpest for Daejeon (from 57.8 to 58) followed by Daegu (from 59.9 to 60.3) and Gyeonggi Province (from 68.8 to 68.9).

Myongji University professor of real estate Kwon Dae-jung said demand for homes will continue precisely due to the failed policies.

"People feel sick and tired of having to find a place to live every two years ― or four years at most with the revision to a related law ― with home owners asking them to raise the lump sum jeonse deposit or pay monthly rent. They find it better to buy a home to relieve the frustration."