Home values continue to slide
By Kim Tong-hyung
Korea’s housing market is as bad as it has been at any point in the past decade. And no relief has yet to come from bumbling government officials, who have observers wondering whether another big policy blunder is on the cards.
A month has passed since the government announced a package of measures to stimulate the housing market and halt the damage to home values, and it’s becoming clearer that the efforts are failing to work as prescribed, if not actually making things worse.
This was highlighted by the creation of a ``bad bank” to soak up soured construction loans to prevent a slew of bankruptcies among builders while also reducing transfer tax rates for homeowners in Seoul and the metropolitan area to encourage property transactions.
However, attempts to artificially boost housing demand so far look woefully off target, as transactions in Seoul and other major urban areas are disappearing faster than they were before June.
Policymakers had been desperate to increase home purchases as the dearth of homebuyers has complicated the country’s housing problems by causing rents to skyrocket.
To boost transactions, authorities moved to exempt more middle-class homeowners in Seoul, Gwacheon and the five major new towns in the metropolitan area, Bundang, Ilsan, Pyeongchon, Sanbon and Jungdong, from paying transfer taxes when properties change hands.
Previously, such tax benefits had been offered to homeowners who just had one property that was priced below 900 million won and had lived there for at least two years. The live-in requisite was lifted under the new scheme that went into effect last month.
The plans, at least initially, look to be having the opposite effect to the one intended. According to the latest data by real estate market researcher Speed Bank, housing prices in Seoul and the six satellite towns dropped by an average of 0.21 percent between June 4 and July 2. The decline in home values was measured at 0.12 percent between May 7 and July 3.
Among areas in Seoul, Gangdong suffered the steepest drop in home prices in the past month at 0.94 percent, followed by homes in Songpa at 0.62 percent.
``The dramatic drop in the home prices in Gangdong and Songpa has much to do with the volume of properties pumped out by reconstruction projects. It had been difficult for owners of to-be-reconstructed homes to be obligated actually live in their properties, and since the government announced the new scheme, many of them have pinned their homes on the market,’’ Speed Bank researcher Cho Min-ah.
``The lifting of the live-in period was intended to boost demand beyond first-time homebuyers and encourage others to buy houses as a form of investment. However, this could only have limited impact when the housing market can no longer provide confidence to investors.’’
Air has been escaping quickly from the country’s once-bloated property sector, which has been decimated by tumbling housing prices and dried-up transactions. And rents have been soaring to new highs with demand continuing to be boosted by frustrated homebuyers.
And now observers are concerned that the housing market is on the verge of another sharp lurch downwards as the country faces an environment of firming interest rates.
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.
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 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 average cost of ``jeonse,’’ or key money, 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 areas, 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 receive 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 crawled back up to above 40 percent in cities in Gyeonggi Province starting in 2007, when the housing market first showed signs of slowing.