Is property market coming back to life?

By Kim Tae-gyu

Just a year ago, pessimism lingered that the nation’s real estate market would face a long-term slide. The aftermath of the global financial crisis ended the unprecedented construction boom here in the early and mid 2000s.

The economic turmoil prompted double-digit depreciation of apartment prices across the country, putting an end to the long-held belief that real estate values never fall.

Apartment prices edged up last year and their values are presently almost back to pre-crisis levels according to Real Estate 114, a domestic consultancy.

“Apartments in Seoul are worth 17.9 million won ($16,000) per 3.3 square meters on average, which approaches the historic high of 18.4 million won reached before the credit crunch,” Real Estate 114 senior researcher Han A-reum said.

The unit of 3.3 square meters is the standard size in real estate transactions here under the unique area measurement “pyong.”

Observers feel that government measures friendly to constructors and rocketing rent prices under the nation’s “jeonse” system are mainly attributable to the market’s recovery.

Jeonse refers to a Korea-specific lease of a house. Instead of paying monthly rent, tenants put down a lump-sum deposit, or jeonse, at the start of a contract.

Landlords are required to return the money at the end of the contract, which usually runs for two years. The upfront payment is similar to key money but the amount is far bigger at about 30-50 percent of the property’s value.

Jeonse prices have skyrocketed since demand outstripped supply. As the financial burdens on jeonse substantially rose, some opted to purchase their own houses instead.

In addition, the government eased the debt-to-income (DTI) ratio regulation last summer under which people are allowed to borrow more from banks when they meet pre-set requirements.

A household with an annual income of 30 million won trying to buy an apartment in non-speculative areas of Seoul can borrow 250 million won with a 20-year repayment schedule, up from the previous 170 million won.

Return of boom years?

The upswing in real estate values brings optimism that the nation’s property markets will end the jitters generated by the economic downturn, which hit the world in 2008.

The bullish run on the Seoul bourse forges such confidence. The benchmark KOSPI surpassed the record high of 2,064.85 points set in Oct. 2007 to top the 2,100 mark last month.

Even though the index has inched down of late, it is still around the pre-crisis high.

“Just a couple of years before, the KOSPI plunged below 900 points and some projected that it would further slump to around 500. Things are totally different now,” Samsung Securities researcher Kim Seong-bong said.

“You can say the property markets overcame the aftermath of the unprecedented economic crisis. As far as the stock markets are concerned, their fundamentals are pretty good.”

Yet, Real Estate 114 warns against overly optimistic sentiments.

“The value of Seoul apartments has risen. But the patterns are different. In the past, the conventional strongholds dubbed as ‘bubble seven’ districts headed the upward trend,” Han said.

“However, they underperformed during the past year. We cannot no longer expect the good old days when house prices just moved upward.”

More than half a million apartments situated in Gangnam, Songpa, Seocho, Mokdong, Bundang, Pyeongchon and Yongin in Seoul and its vicinity make up the bubble seven.

The seven areas’ apartment prices have struggled to catch up with the overall markets. Those in Bundang, Pyeongchon and Yongin are some 15 percent lower than the previous highs.

“We cannot definitely say that apartment values will continue to go up. So many uncertainties weigh on investor sentiment. We need to see whether the nation will extend the eased DTI rules beyond March,” Han said.

“Another issue is interest rates. As the Bank of Korea (BOK) tends to raise the borrowing rates, people would be reluctant to buy apartments on large-sized leverage.”

The central bank slashed the overnight borrowing rates to a record-low 2 percent to boost the moribund economy in the wake of the financial crisis, which prodded commercial banks to keep interest rates very low.

Yet, the BOK raised rates by 0.5 percentage points to 2.5 percent last year in line with the economic recovery. It hiked them to 2.75 percent last month and further increases are likely.

“The BOK will convene this Friday. Nobody knows for sure what decision the bank will make regarding the benchmark interest rate,” said a Seoul analyst who asked not to be named.

“Considering that one of the incumbent administration’s top priorities is to tame inflationary pressures, the central bank might ratchet up the rate two months in a row.”

This would result in heightened borrowing costs discouraging Koreans from buying new homes with mortgages: news that real estate agents would hate to hear.