Will it ever make sense again to buy a home?
Policymakers desperate to boost demand; critics say Korea has already seen its housing peak
By Kim Tong-hyung
As Ahn Seok-woo gazes around his 15th-floor apartment, his facial expression gives away both admiration and pain.
It’s easy to see why he fell in love with his neatly-kept northern Seoul flat as the sun streams through the floor-to-ceiling windows and splashes over the wooden floors of the expanded living room.
The problem is that the 43-year-old architectural designer bought the apartment at the height of Korea’s property market in 2006 with the help of a huge bank loan. Any uneasiness about the 400 million won (about $352,000) plus splurge he managed to suppress with blind faith that house prices in Seoul would be increasing forever.
Much to his dismay, property values in Seoul have been dropping like the Greek stock market since Lehman Brothers came tumbling down in 2008. This has trapped millions of homeowners such as Ahn in negative equity, leaving them laboring through loan repayments and wondering ``what might have been.’’
Financially and emotionally distressed, Ahn held up until the start of the year before putting the house up for sale. He hasn’t been getting many calls and he is now considering renting it out.
``I love the house and still do, but this has clearly been the worst financial decision I made in my adult life. The silver lining I guess is that I don’t have a wife or kids thrown into this financial burden,’’ Ahn said.
``I accept that I will be selling this house at a significantly lower price than what I bought it for, which is particularly painful considering the level of inflation in recent years. I don’t know when someone will take this house off my hands, but I wonder whether this will be the last house I will ever own outright for the rest of my life.’’
It’s the skeptic homeowners like Ahn who continue to concern government officials as they continue to put in Herculean efforts to wake the property market from its multi-year coma.
Policymakers at the Ministry of Strategy and Finance and the Ministry of Land, Transport and Maritime Affairs have been sounding like a broken record in recent months: The gap between the cost of housing purchases and rents is at the narrowest in history and this indicates that the housing market is about to hit the bottom and enter a rebound period. Ergo, these definitely are great times to buy a house.
However, optimism is hard to sell in a country where a spectacular housing market crash has left millions of households sinking under a sea of debt. Some observers believe that the housing sector has already crossed the Rubicon, so to speak, and this side of the river is kinder to tenants than to homeowners and landlords.
The simple laws of supply and demand would suggest that Korean house prices will be entering a lengthy period of decline and may have already. Oversupply is already becoming a factor in the crowded Seoul and metropolitan area and the rapid aging of the country’s population continues to eat away at demand.
Subduing economic growth and the decaying job market, which is hitting school leavers and graduates harder, also appear to be blighting the younger generation’s chances of buying a home.
It’s obvious that owning a home, a traditional symbol of financial security and prosperity, now is economically beneficial to fewer and fewer people. The country might have taken an irrevocable turn toward becoming a place where landlords compete ferociously for tenants, or essentially, Japan-lite.
The fall in house prices will only gain speed once indebted families really begin to sell low on their properties to fund the rising costs of day-to-day living.
A recent survey by DSD Samho, an analysis firm for the construction and real-estate markets, showed nearly 50 percent of homeowners in Seoul and Gyeonggi Province cities who have currently put their houses up for sale were planning to use the proceedings to repay their debt. Nearly 90 percent of them admitted difficulties in servicing their debt, such as repaying interest.
``For the average income-earner, there is only one scenario left where it makes sense to buy a house, and it happens to be the unlikeliest,’’ chirped in Kim Jin-yeong, a real-estate agent in Jeongneung, Seoul.
``If the housing market really is going to rebound to the heights it reached in the first eight years of the 2000s, then it’s crazy not to buy a house, even if that means you use up all your savings and swallow a massive bank loan. But it’s hard to see that happening, isn’t it?
``So obviously, many would-be homebuyers are now realizing that rents are the way to go. And if the housing market really does lapse into a Japanese-style long-term decline, two-year `jeonse’ contracts could turn out to be dangerous as well and it would be more reasonable for tenants to go `wolse,’ or monthly contracts.’’
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.
Policy failures galore
While all signs indicate that Korea has already seen the housing market at its mightiest, government officials nonetheless continue to scramble to artificially boost the demand for homes.
The ministries of finance and land on Thursday are expected to announce a new set of measures aimed at stemming the skid in house prices and helping homebuyers and tenants.
Well, the problem is that it would be the fifth package of such purpose the government has introduced since the start of 2011. None of the previous moves have worked as prescribed and it’s hard to imagine any fresh measures being enough to convince critics who are sensing another policy blunder on its way.
While the ministries have yet to unveil the outline of the policies which are to be announced later at the Gwacheon government complex, they are expected to loosen anti-speculation measures imposed on the affluent southern Seoul neighborhoods that keyed the mid-2000s housing boom.
Authorities are also considering lifting the pricing caps on unsold new homes, although easing lending restrictions based on debt-to-income (DTI) ratios, which limit the borrowing of homebuyers in proportion to their annual income, seems out of the picture.
Finance Minister Bahk Jae-wan, a self-confessed sports fanatic, has a habit of making baseball analogies when confronting tough questions. When asked recently about how the ministry will design its future real-estate market policies, Bahk compared himself to a baseball batter who is looking to make contact rather than a big hit.
``We won’t be sending a slugger out there,’’ Bahk said at the sidelines of the recent Asian Development Bank (ADB) conference in Manila, the Philippines.
``The environment is forcing us to play `small ball,’ which means making contact, bunting and overcoming the lack of big hits with speed on the bases. In terms of property market policies, we don’t have a homerun hitter warming up in the dugout.’’
Since the recent financial crisis, Korean homeowners have endured a dramatic drop in prices after the most recent boom drove up values and fueled a nationwide borrowing binge that now has the consumer debt mountain matching an entire year’s gross domestic product (GDP).
Government officials, seemingly unfazed by their lengthy streak of ineptitude, continue to claim that the housing market will warm up in 2012 or what's left of it. Critics, who include a growing school of economists, say the market will be lucky to avoid going into a deep freeze.
The gap between house purchase prices and jeonse costs is as narrow as it ever was. Jeonse prices rose by around 7 percent in Seoul and the metropolitan area and by more than 10 percent in provincial cities over the past year, making a mockery of government attempts to tame rent by encouraging transactions.
To an increasing number of observers, it’s becoming obvious that Korean house prices will never reach the heights hit during the market’s mid-2000s boom. Housing bubbles in Japan, the United States and Britain began to pop when household debt in these countries reached 95 percent of their GDP but Korea has long passed that point.
Critics say the country would actually benefit from a prolonged period of slow growth or even falling house prices, as despite the recent skids, 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.