Pre-crisis premonitions or bumps in road?

Housing market still swooning but 2nd big jump in rents may be in offing

By Kim Tong-hyung

Korea’s housing market is on the verge of another sharp lurch downwards as rents continue to lose their sense of gravity in an environment of firming interest rates.

Air has been escaping quickly from the country’s once-bloated property sector, which has been decimated by tumbling house prices and dried-up transactions. And rents have been soaring to new highs with demand continued to be boosted by frustrated homebuyers.

Now observers are concerned that the effect of future interest rate rises would suck more Koreans into the housing crisis sweeping the country.

In a surprise decision last month, rate setters at the Bank of Korea (BOK) increased the country’s policy rate by a quarter of a percentage point to 3.25 percent, discarding their trigger-shyness of previous months to admit that the inflationary threat has become too great to disregard.

Consumer price inflation has been at least a point above the government’s 3 percent target for every month this year through May to torment government officials who insisted on putting growth before price stability.

With higher prices resulting in an acute squeeze of living standards here, policymakers are beginning to accept that a stronger clamp down on money supply is inevitable. However, it could be said that an additional blow to family finances was unavoidable either way as the country’s spectacularly indebted households fear a crunch from increased borrowing costs.

The elevated cost of home loans will make it more difficult for home seekers to find a property, according to housing market experts, who expect rents to soar at an even steeper trajectory from here now on.

Landlords have been hiking their rents in the past months as the supply of rental homes hasn’t been increasing fast enough to meet the new levels of demand, driven by first-time buyers delaying their decision to scale the property ladder in the face of housing market and economic uncertainty.

Rents will further be boosted by the imminent rise in interest rates as homeowners, many of them having acquired their properties through mortgages, pass on the increased costs to tenants.

``The real estate market will now be swayed dramatically by the changes in interest rates. The expected increase in borrowing costs will further convert the demand from home purchases to rents and also make the financial burden of homeowners heavier,’’ said Park Hap-soo, a real estate market expert at KB Kookmin Bank.

``The summer holiday period is traditionally a high-demand season for rent and this gives you another reason to expect the costs to rise dramatically. Firmer interest rates will make it harder for both homebuyers and landlords to get mortgages, so it could be said that the Korean housing situation is caught in a vicious cycle.’’

The gap between rent and home prices has already narrowed to its lowest margin in seven years, according to recent statistics from research firm Real Today. Although optimists say that property booms are triggered when the rent-house price gap shrinks to a certain margin, the rising interest rates suggest that the tipping point will be elusive.

The average cost of ``jeonse’’ across the country was up to 59 percent of purchase prices as of May, the highest level since 59.5 percent in the same month of 2004. Jeonse prices in Seoul have reached 47 percent of purchase prices and the figure was 47.9 percent in neighboring metropolitan cities, the highest since October 2006.

Jeonse refers to Korea’s unique housing rental system employed in more than half of rented households here. It is a deposit that tenants pay to landlords when their contract starts. Tenants get the money back with no interest when the contract expires, with the interest earned by the landlord counting as rent.

The rent-to-price ratio in the metropolitan area shifted to around the 50 to 60 percent range during the early 2000s, before dropping below the 40 percent level as the real estate market gained momentum between 2002 and 2006.

However, the ratio was pushed back to above 40 percent in cities in Gyeonggi Province starting in 2007, when the housing market first showed signs of slowing.

After enjoying a boom in the early-to-mid 2000s, the country’s housing market has been freefalling since the recent financial crisis, but not before inspiring a borrowing binge that has raised household debt to historically high levels.

Less than six years after surpassing 500 trillion won, the mountain of debt amassed by Korean households reached a new high of 801.4 trillion won (about $738 billion), rising by 6 trillion won in the first quarter of this year, according to BOK figures.

The central bank’s figures represent borrowing from financial institutions such as banks, mutual savings banks, credit card companies and state housing finance agencies. When combined with unsecured loans, the country’s household debt is believed to be around 1,000 trillion won, matching an entire year’s gross domestic product (GDP).

Millions of homeowners, who had borrowed ruthlessly in previous years to take advantage of speculative property demand, now find themselves trapped in negative equity.