Has property market hit rock bottom?

By Kim Da-ye

Buying a home at the lowest price possible is everyone’s dream and timing is crucial to do so. For months the housing market has remained sluggish causing would-be home buyers to wonder if the property market has hit rock bottom and if they should make the deal of their life now.

Signs show that housing prices are slowly rebounding, but experts interpret it differently, giving various forecasts on where the market is heading. Many agree that in the long run, housing prices will stabilize. For now, unfortunately, home buyers will have to rely on their own judgment.

In September, prices increased 0.1 percent across the country as households tend to move in the fall season and demand from newlyweds was high, according to statistics from Kookmin Bank.

The prices have dropped for six months straight in Seoul as would-be home buyers would rather wait for the public housing named “Bogumjari Housing” and apartments for a long-term lease. The rate of the drop, has slowed somewhat, down at 0.2 percent in September compared to 0.3 percent in July and 0.4 percent in August.

In addition, the Ministry of Land, Transport and Marine Affairs reported that the trading volume grew 8.6 percent from a month earlier to 33,685 across the country in September and 11.5 percent in the capital area.

The media have also reported that sellers in the district south of the Han River are increasingly calling for higher prices and many people have shown up at “model house,” showrooms that are decorated like real apartments to be constructed.

The numbers above have led to the belief that the property market has already hit bottom and is reviving. Others view it as a temporary trend that typically appears in the fall.

Samsung Economic Research Institute (SERI) gives a more constructive explanation on why the property market won’t get worse. Its report says that thanks to the policies that restricted lending to home buyers, the housing prices did not fluctuate dramatically during the financial crisis and won’t after.

In the U.S. where some home buyers have managed to fully finance new homes with mortgages, the loan-to-value ratio ― the portion of the mortgage loan against the property value ― is as high as 74.9 percent while the ratio was limited in Korea at between 40 and 60 percent depending on the region.

SERI also argues that the retirement of the baby boomers and the aging society won’t affect the property market greatly because the elderly in Korea like to own a home. As household sizes become smaller, their numbers increase.

Furthermore, the portion of those with their own home in Korea is low at 55.6 percent in 2005, compared to 73.5 percent in the U.K. in 2007 and 61.2 percent in Japan in 2008, the report says, adding that the figure indicates there is still much need for new houses.

Many experts, however, do not agree with the upbeat report. In the short term, newly built apartments that are yet to be filled won’t cause housing prices to rise.

As of July, about 106,000 houses that are yet to be constructed haven’t found an owner. The rate of accommodation of homes that have been completed but are still vacant is at 47.4 percent ― the highest figure since the 1998 economic crisis.

Jang Min of the Korea Institute of Finance points out that the apartments that were built after 2007 tend to be medium-sized or large while the number of households with three members or fewer is soaring. Despite the high vacancy rate, the gap between supply and demand is growing.

In the long term, experts say the property market should stabilize along with the economy, and that’s what the government is aiming for.

“Houses will continue to be supplied while baby boomers are retiring. The housing prices are now on a downturn. No, let’s say that they will stabilize,” says Yang Seung-chul, a research director of the state-funded Korea Real Estate Research Institute, adding that the housing prices are, in general, high compared to the general levels of income.

Yang says that the long term goal of the government is the soft landing of the property market. The government won’t let housing prices drop radically ― for instance, by relaxing the debt to income ratio to encourage property purchases.

The Samsung research center estimates that the cost of the sluggish property market to the economy between October 2009 and July 2010 is at least 15.7 trillion won.

“A long-term contraction of the property market brings deflation in assets, affects the finance industry negatively and freezes consumption, causing a great burden to the economy,” says the center.

Hanwha Securities analyst Lee Kwang-soo says that the aging society won’t affect the property market now, but will after 2018. In 2019, the decrease in the number of households that need accommodation will begin leading the price drop.

In the long run the stabilization of the housing market is only natural as the Korean economy matures. Son Jae-young, professor at the Department of Real Estate at Konkuk University, says, “When the economy and inflation calm down, that will steady the property market, too.”