By Choi Sung-jin
The government's policy to prop up the economy by stoking the real estate boom and record-low interest rates have combined to drive property bubbles to a dangerous level, experts say.
"Apartment prices have soared 300 million won ($272,000) over the past three months on the news of rebuilding aged flat houses," said a realtor in Seoul's posh Apgujeong area south of the Han River, or Gangnam. "Residents are happy with rocketing home prices but also are scared about too steep a surge."
The real estate market in and around Seoul is becoming speculative, resembling that of a decade ago, experts said Monday.
Despite the government's policy on Aug. 25 to cool the speculative frenzy, which calls for, among other things, controlling new construction, the competition rate to subscribe for apartments subject to reconstruction has exceeded 100:1. On the other hand, housing prices in southeastern provinces, including Daegu and Ulsan, have fallen in what watchers say is a "polarization of home prices."
Leading the abnormally overheated property market is the reconstruction of deteriorated apartments in some parts of the capital city. A 57-square-meter flat in southern Seoul, for instance, is changing hands at 1.35 billion won, up 240 million won from July. "Investors are paying high premiums with profits in mind after they are rebuilt into high-rise flats," said Yang Ji-young, a researcher at Real Today.
Experts said transactions of apartment-purchasing rights and their prices have surpassed previous highs reached during the last bubble of 2006-08. Concerns about a possible supply glut could become a reality, too. According to Real Estate 114, builders are expected to supply 546,684 new apartments from 2015-16 but the volume will likely sharply increase to 736,507 apartments from 2017-18.
The biggest reason for the overheated property market is record-low interest rates.
More people who are experiencing difficulties finding proper investment targets are borrowing money from banks at a low rate and investing in homes in "hot areas," realtors said.
"The situation is little different from the United States and Europe where low interest rates are pushing up housing prices to abnormally high levels," said Song In-ho, a researcher at the Korea Development Institute. "Worse yet, there is a phenomenon of polarizing home prices in Korea where the housing market in Seoul and the capital area is unduly hot while those in the southwestern area are abnormally cold."
Government officials are at a loss what to do.
The Ministry of Land, Infrastructure and Transport acknowledges overheated property markets in some areas but is hesitant to come up with strong anti-speculative measures for fear of an abrupt bust of the bubble amid the glut of housing supply next year.
"The adverse effects of the Park Geun-hye administration's policy to reignite the real estate boom have begun to emerge," said Professor Cho Myung-rae of Dankook University. "Unless it comes up with a stabilization policy until the year-end, bubbles will grow bigger."
Officials are not exactly sitting idle, however. Meeting reporters Monday, Lim Jong-ryong, chairman of the Financial Services Commission, said authorities will advance the implementation of cooling-off measures announced late last month.
Authorities, for instance, will tighten terms for mortgages, lowering the loan-to-value (LTV) ratio from 50-80 percent to 40-70 percent in November while checking the applicants' other debts, even credit card bills, in loan screening.
Yet experts say these measures will fall short of calming the property market. "It's as if the officials are saying ‘we are releasing some measures given the serious state of household debt but we can never quench the property boom at the risk of killing the momentum of economic recovery,'" said Professor Kim Kyung-hoon of Dongguk University.
Noting that the measures could lead to greater shocks when the bubble bursts as a result of U.S. interest rate hikes or a further slowdown of the domestic economy, Kim called for more drastic steps, such as much tighter controls on mortgage lending and restrictions on the transactions of apartment-purchasing rights.
Other critics stressed the Park administration should overhaul the basis of its real estate policy.
Rep. Je Yoon-kyung of the opposition Minjoo Party of Korea said the price of "jeonse" -- Korea's unique home-leasing system in which renters make lump-sum deposits on properties instead of paying monthly rent -- has soared 12 percent a year on average over 47 months while disposable income rose only 2 percent a year.
"The government's policy to encourage people to buy homes with borrowed money has led to a rocketing jeonse price and housing insecurity," Rep. Je said. "There should be a fundamental change in real estate policy from facilitating housing transactions to stabilizing rental prices."
The government's policy to prop up the economy by stoking the real estate boom and record-low interest rates have combined to drive property bubbles to a dangerous level, experts say.
"Apartment prices have soared 300 million won ($272,000) over the past three months on the news of rebuilding aged flat houses," said a realtor in Seoul's posh Apgujeong area south of the Han River, or Gangnam. "Residents are happy with rocketing home prices but also are scared about too steep a surge."
The real estate market in and around Seoul is becoming speculative, resembling that of a decade ago, experts said Monday.
Despite the government's policy on Aug. 25 to cool the speculative frenzy, which calls for, among other things, controlling new construction, the competition rate to subscribe for apartments subject to reconstruction has exceeded 100:1. On the other hand, housing prices in southeastern provinces, including Daegu and Ulsan, have fallen in what watchers say is a "polarization of home prices."
Leading the abnormally overheated property market is the reconstruction of deteriorated apartments in some parts of the capital city. A 57-square-meter flat in southern Seoul, for instance, is changing hands at 1.35 billion won, up 240 million won from July. "Investors are paying high premiums with profits in mind after they are rebuilt into high-rise flats," said Yang Ji-young, a researcher at Real Today.
Experts said transactions of apartment-purchasing rights and their prices have surpassed previous highs reached during the last bubble of 2006-08. Concerns about a possible supply glut could become a reality, too. According to Real Estate 114, builders are expected to supply 546,684 new apartments from 2015-16 but the volume will likely sharply increase to 736,507 apartments from 2017-18.
The biggest reason for the overheated property market is record-low interest rates.
More people who are experiencing difficulties finding proper investment targets are borrowing money from banks at a low rate and investing in homes in "hot areas," realtors said.
"The situation is little different from the United States and Europe where low interest rates are pushing up housing prices to abnormally high levels," said Song In-ho, a researcher at the Korea Development Institute. "Worse yet, there is a phenomenon of polarizing home prices in Korea where the housing market in Seoul and the capital area is unduly hot while those in the southwestern area are abnormally cold."
Government officials are at a loss what to do.
The Ministry of Land, Infrastructure and Transport acknowledges overheated property markets in some areas but is hesitant to come up with strong anti-speculative measures for fear of an abrupt bust of the bubble amid the glut of housing supply next year.
"The adverse effects of the Park Geun-hye administration's policy to reignite the real estate boom have begun to emerge," said Professor Cho Myung-rae of Dankook University. "Unless it comes up with a stabilization policy until the year-end, bubbles will grow bigger."
Officials are not exactly sitting idle, however. Meeting reporters Monday, Lim Jong-ryong, chairman of the Financial Services Commission, said authorities will advance the implementation of cooling-off measures announced late last month.
Authorities, for instance, will tighten terms for mortgages, lowering the loan-to-value (LTV) ratio from 50-80 percent to 40-70 percent in November while checking the applicants' other debts, even credit card bills, in loan screening.
Yet experts say these measures will fall short of calming the property market. "It's as if the officials are saying ‘we are releasing some measures given the serious state of household debt but we can never quench the property boom at the risk of killing the momentum of economic recovery,'" said Professor Kim Kyung-hoon of Dongguk University.
Noting that the measures could lead to greater shocks when the bubble bursts as a result of U.S. interest rate hikes or a further slowdown of the domestic economy, Kim called for more drastic steps, such as much tighter controls on mortgage lending and restrictions on the transactions of apartment-purchasing rights.
Other critics stressed the Park administration should overhaul the basis of its real estate policy.
Rep. Je Yoon-kyung of the opposition Minjoo Party of Korea said the price of "jeonse" -- Korea's unique home-leasing system in which renters make lump-sum deposits on properties instead of paying monthly rent -- has soared 12 percent a year on average over 47 months while disposable income rose only 2 percent a year.
"The government's policy to encourage people to buy homes with borrowed money has led to a rocketing jeonse price and housing insecurity," Rep. Je said. "There should be a fundamental change in real estate policy from facilitating housing transactions to stabilizing rental prices."
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