A bird-eye view of Haeundae area in Busan / Korea Times file

By David Choi

Busan’s residential market has clearly shown the typical Korean “too much volatility” trend for three years since January 2009.

The regional real estate market went through the worst slump in the aftermath of the global financial crisis in early 2009. But, soon after the third quarter of 2009, it showed obvious signs of recovery, particularly around the Haeundae area with over 5,000 transactions in one month.

Apart from growing demand, there has been a serious shortage of new apartments. Only 3,788 came onto the market during 2009, fewer than monthly transaction volumes.

Disparities between supply and demand directly influenced the total volume of transactions and their prices that led to a “nationwide investment boom” in 2010.

It was time to expand consumer segments into investors from Seoul and the capital area by forming an attractive market atmosphere with landmarks such as Centum City and Marine City.

As the price resistance became smaller, the expectancy of investment income reached its peak point. December 2010 saw an all-time high record with 7,541 transactions.

An upward trend continued into the first half of 2011. In the second half, however, concern over price increases and over supply led to a sharp decline in prices.

2009 vs. 2012

The latest shrinking of Busan’s apartment market has similar signs to events in 2009.

Initially, there was a dramatic decrease in transaction volumes.

More than 1,900 apartment deals were made in January 2009, and the figure slightly increased in February to 2,750 transactions.

There were only 1,168 transactions in January 2012 and 2,060 transactions in February respectively. This is half the number of transactions for the same months in 2010 and 2011 ― 5,303 and 5,266, respectively.

Secondly, those were times when the unstable financial market caused an overall economic downturn forming fear of uncertainty.
The year 2009 suffered from the effects of the U.S. sub-prime mortgage crisis and the bankruptcy of Lehman Brothers. Now in 2012, there is financial crisis in Europe and economic recession in the U.S.

Thirdly, there were common aspects that the government’s new real estate policy such as the abolition of price caps, lifting of speculative zones and relaxed regulation of taxes failed to stimulate the market and felt out of place.

What has been found to be in common is that the imbalance between supply and demand and speculative disturbance weakened the real estate market while previous government’s policies not only malfunctioned but also brought about tolerance towards policy impacts.

Fourthly, Busan’s real estate market shows a three or four-year cycle of cut-off and oversupply. And the vicious cycle of providing similar products at the same time keeps repeating itself because of competitive building construction and strata title sales during times the market is invigorated.

This leads to price drops for existing apartments that ends up lowering market prices because of increased vacancies in new complexes.

I am concerned about this situation, linked to price bubbles and excessive supply, which could cause price spikes in three to four years due to an absence of new property on the market.

As there are common factors in two different situations, analyzing these two market circumstances will help us to understand current market trends and suggest a market forecast.

First of all, oversupply in early 2009 was caused by excessive supply plan covering the entire Busan area during 2004 and 2005.

Excessive supply in 2012, however, was caused by massive residential projects in Haeundae area such as Centum City or Marine City. Therefore, there is concern that the influence of oversupply this year will be longer-lasting and larger than 2009.

Due to the relatively large and expensive residential buildings in these areas and high ratio of speculators investing in multiple products for profits, a bubble effect is taking place.

As real estate investment groups in the Busan area could not afford another investment due to decreased capital, it is expected that major construction companies will adjust their business plans for the residential market.

Another difference between two situations is the growing demand for income gain products (IGP). Recently, real estate investors are changing the method of investment to dilute speculation. Demand for IGP has increased while these products were only considered as a minor market before 2010.

One thing to note is that market changes might seem to repeat in similar situations, but delicate factors lead to different results.

I agree that the recession in the residential market in 2012 is likely to last longer than that of 2009, but at the same time, we should keep an eye on the fact that the downward tendency in Busan’s residential market for the last six months has stopped and the recent two months’ records both in the volume of residential building and sales prices appear to have increased.

David Choi is the general manager of Cushman & Wakefield Korea’s Busan office.