Buyers puzzled over elusive recovery
Housing market stays in funk despite narrowing renting-buying gap
By Kim Tong-hyung
Real-estate agents will say now is a great time to buy a home. Ask them to explain their paucity of customers, however, and they turn sad, confounded and speechless.
``I can’t guarantee to find a buyer for your house even if you agree to take off one-third of the price you bought it for. But if you offer your home for rent, I could find a taker in no time,’’ said Kim Jin-yeong, a real-estate agent in Jeongneung, Seoul.
``These have been tough times for those in my profession. I read in the newspaper that some real-estate agents are selling gimbab (rice, meat and vegetables rolled in seaweed) at the corner of their offices. I can relate to that as my wife, also a licensed real-estate agent who worked with me, now spends more time as a professional babysitter.’’
Since the collapse of Lehman Brothers in 2008, homeowners here have experienced a dramatic drop in prices after the most recent boom drove up values and triggered a nationwide borrowing binge that now has the consumer debt mountain matching an entire year’s gross domestic product (GDP). Skidding prices have been coupled with rents soaring to record highs as demand continues to be boosted by frustrated home-buyers.
Optimists in past months have been pointing to the narrowing gap between the cost of renting a home and buying one in declaring the housing sector as ripe for a rebound. This is indeed becoming the ultimate buyer’s market, they say, and the jump in rent prices suggest that real, non-speculative housing demand continues to be strong.
But when it comes to the future of the housing market, optimists represent the smaller school of opinion, as while their arguments look sound on paper, the numbers aren’t bearing them out. Skeptics are becoming only bolder, many of them going as far as to forecast a Japanese-style nosedive.
According to KB Kookmin Bank’s nationwide housing price index, the difference between the cost of buying a home and renting one was less than 50 percent in Seoul as of March, representing the smallest gap in eight years.
After first breaching 50 percent in December last year, the prices of ``jeonse,’’ Korea’s dominant housing rental system, accounted for 51.4 percent of purchase prices last month, the highest level since 50.1 percent in December 2003. Jeonse prices accounted for 55 percent of purchase values in neighboring Gyeonggi Province cities, the bank said.
Jeonse, a financial tool unique to Korea, is based on a lump sum deposit tenants pay to their landlords at the start of a rental contract. Tenants have the money returned with no interest when the contract expires, typically after two years, with the imputed interest considered rent.
The annual rise in house prices was measured between 3 to 12 percent in the four years through 2008. Since then, the housing market has slipped into what is increasingly looking as an inexorable decline, with the fall most dramatic in the affluent areas of southern Seoul, which had driven the country’s housing bubble.
According to property market researcher Real Estate Serve, the combined purchase value of homes in Seoul and metropolitan cities was measured at 1.31 quadrillion won (about $1 trillion) as of late-March, representing a 27.5 trillion won drop over the past 12 months.
This backed separate data by Real Estate 114, which shows that the prices of homes sold in Seoul dropped by nearly 3 percent just in the past year.
While buying a home is more affordable, the dearth of transactions proves it makes increasingly less economic sense. Real estate agents like Kim say many of the apartments put up for sale in Seoul now are 30 to 40 percent cheaper than they were before 2008. But, amid the housing market and economic uncertainty, homebuyers believe there is still much room left for prices to fall.
Inevitable becomes reality
The biggest obstacle toward a housing market recovery, according to some observers, is that owning a house is no longer a symbol of prosperity and financial security.
``While price falls in southern Seoul and metropolitan cities have been dramatic, there seems to be a collapse in faith that house prices will rise again. This dissuades many would-be borrowers from taking out loans and bearing the debt servicing costs,’’ said Kim Kyu-jeong, a researcher from Real Estate 114, who says that the cost of borrowing from banks are too high for lower income earners.
Another problem, experts say, is that the demand for buying homes usually depends on ``convertors,’’ or those selling their old properties to move into new ones. These peoples can’t move on when nobody’s buying their existing homes in the first place.
While the mid-2000s housing bubble was fueled by speculative demand, the outrageous consumer debt levels suggest that Koreans are maxed out on their ability to continue the high-stakes property gambles.
By broader measures, the consumer debt mountain has already exceeded one quadrillion won, which has made the household debt to disposable income ratio speed toward 160 percent.
This is significantly higher than the 135 percent average of developed Organization for Economic Cooperation and Development (OECD) nations at the end of 2010. A damning reminder is that the housing bubbles in Japan, the United States and Britain began to pop when household debt in these countries reached 95 percent of their GDP, a milestone Korea passed quite a while ago.
Critics say the country would actually benefit from a prolonged period of slow growth or even falling house prices, as despite the dramatic price falls, the majority of lower paid workers remain shut out of the housing market. Allowing house prices to fall would provide a significant step in helping first-time buyers and other groups worthy of government support, they say.
Nonetheless, the government continues its attempt to artificially boost housing demand, insisting that the market has one last rebound in it. But most economic data suggest that the efforts will prove as futile.
The rapid aging of Korea’s population reduces the changes of a renewed housing boom as much as household debt and stagnant income, according to some experts. The population of people in their mid-30s, which is considered to be the most active in the housing market, is also among the age groups that are declining the quickest, according to data from Statistics Korea.
Government officials claim that demographics aren’t enough to justify a negative outlook for housing market activity. There are signs that older people will continue to engage actively in the housing market beyond their retirement and the increase in one-person households will sustain the demand for smaller housing units, they say.
However, it’s difficult to take this logic seriously. According to official figures, about 50 percent of one-person households are stuck in the lower-income bracket after failing to earn 2 million won per month, which effectively prevents them from being serious players.