By Lee Hyo-sik
Staff Reporter
The nation's property market is showing increasing signs of bubbling up, with many Koreans, who learned costly lessons from the 1997-1998 financial crisis, scrambling to snap up undervalued properties before the economy gets back on track.
The latest data indicate that the property market is overheating. Jeonse prices, a leading indicator of the sales prices of houses, are creeping up, while mortgages have been on a sharp rise. "Jeonse" is a lease system in which a tenant pays a lump-sum deposit for a two-year rental period.
Market analysts here are warning that if greater liquidity flows into the real estate market, it will push up home sales and rental prices in and around Seoul to a record level and may create a bubble, particularly in the affluent Gangnam area.
According to the Financial Supervisory Service (FSS) Friday, outstanding mortgages stood at 341.4 trillion won as of the end of August, up 4.2 trillion won from a month earlier.
The amount jumped by over 4 trillion won each month during the June to August period, despite the fact that summer has traditionally been an off-season for real estate transactions.
It is widely expected that home prices will increase by a larger margin from September through November as families here normally look to find a house in the autumn.
In recent months, more individuals have borrowed money to purchase apartments and other types of residential homes in and around Seoul on growing expectations for economic recovery.
The record-low interest rate also encouraged them to take out loans and buy properties and other tangible assets to realize capital gains later when the economy returns to normal.
Home rental prices have shown an even steeper upward curve. Jeonse prices have been rising sharply since March, mainly due to the insufficient supply of new apartments.
The situation has been compounded by soaring housing demand in the wake of ample liquidity and the record-low interest rate.
According to Real Estate Serve, only 31,013 new apartments are scheduled to be built this year, nearly 25 percent less than last year. The supply will be even smaller in 2010, with only 21,954 on the supply list. This means rental prices are expected to rise for a few more years, which will also likely push up the prices of apartments.
Additionally, many older residential areas in and around Seoul are about to undergo redevelopment, which means residents there have to find other places to live, further pushing up housing demand and rental prices.
"It is hard to project whether a sharp rise in mortgages will create a real estate bubble in the Seoul metropolitan area. But apartment prices in southern Seoul have exceeded the previous highest level and are widely expected to go up further. It is safe to say that home prices in Gangnam are certainly overvalued and contain an element of a bubble," Real Estate 114 market analyst Kim Kyu-jung said
Financial regulators are moving to further tighten lending standards for mortgages The regulator has already lowered the loan to value (LTV) ratio to 50 percent from 60 percent in Seoul and adjacent areas.
On Friday, the FSS also decided to apply the debt-to-income ratio regulation to all districts in Seoul and surrounding areas. Currently, only three districts in affluent southern Seoul - Gangnam, Songpa and Seocho ― are subject to the DTI rule.
The new rules, effective Monday, will ban home buyers in Seoul from spending more than 50 percent of their annual income to service mortgage loans exceeding 50 million won ($40,300), according to the FSS.
A 60 percent DTI ratio will be applied to home buyers in the Gyeonggi and Incheon areas, the watchdog said.