Apartment Prices Going Down for Now

By Kim Tae-gyu

Staff Reporter

The rule of thumb for Korean investors has been to buy apartments of which prices have soared over the past several decades. But the principle seems to be betraying these investors in the aftermath of the financial crisis.

Real Estate 114, a domestic property consultancy, said Monday that the apartment values of Asia's fourth-largest economy are continuing to depreciate, extending the losing streak to five straight weeks.

In particular, the prices have slipped seven weeks in succession in Seoul and its vicinity. A set of properties are purportedly on offer at a price of more than 100 million won lower than its peak in Bundang, Gyeonggi Province but still there is no demand.

Experts point out that the current downward spiral is exceptional since the economy is faring pretty well, recovering from the global financial tsunami, which hit the country in late 2008.

``In the past, apartment prices outperformed the economy. Their values always went up. But things are different. Even with the economy back on right track, apartment values are struggling to regain their value,'' a Seoul analyst said.

``The consensus is that the primary direction of the market is heading south. There would be some rebounds similar to spurs in market rallies in the stock markets but the overall trend cannot be reversed.''

Apartments due for reconstruction in Gangnam, arguably the most expensive property area located in southern Seoul, have also been affected by the bearish atmosphere.

Real Estate 114 reported that the prices of the expensive apartments in Gangnam dipped 0.07 percent in February and 0.55 percent last month. Plus, the losing skid continues into this month.

Speed Bank, another real estate information provider, had similar survey results. It said that apartments due for reconstruction in Gangnam are selling for a low 29.8 million won per 3.3 square meters, which equals one pyeong.

In spite of the prolonged economic slump, the value of Gangnam apartments due for reconstruction had hovered above the 30 million won plateau per 3.3 square meters but the persisting lack of demand has pulled the price down below the mark.

Most experts agree that the Korean real estate markets have bubbles, which are not sustainable because the values overly appreciated starting in the 1980s despite a variety of anti-speculation measures.

Yet, they do not expect the bubbles to burst in the short term.

``People thought that apartment prices would rise no matter what policies were drafted by the government in the past. But they expect exactly the opposite things at the moment,'' a real estate agent in Seoul said.

``Because they project the prices will head down in the future, they are reluctant to buy and the tendency is highly expected to linger. You know, whatever people believe materializes in the economy.''

Lost Decade

In this climate, some worry that Korea may follow in the steps of Japan where real estate values plunged during a long-lasting depression, dubbed the Lost Decade.

The Lost Decade refers to Japan's near-zero economic growth in the 1990s when the stock prices plummeted almost 80 percent and real estate values halved despite the world's No. 2 economy's desperate efforts to deal with the slump.

Nomura Securities, Japan's foremost investment bank, pointed out earlier this month that Korea faces a similar situation to that of Japan ahead of the bubble burst.

``Korea is currently in an economic situation that is surprisingly similar to that of Japan in the late 1980s when the bubble was initiated … Japan's bubble economy and the present Korean economy share a set of aspects in common,'' the brokerage said.

For example, the entity took issue with the rich liquidity available thanks in no small part to the record low interest rate.

Japan slashed its interest rates in 1986 and 1987 to stimulate its economy. Korea also lowered lending rates by 3.25 percentage points in the aftermath of the financial distress to a record low 2 percent early last year.

Nomura said that the low interest rates generate an overflow of liquidity, which creates a bubble.