Will higher jeonse boost sales?
Jeonse, the large lump-sum deposit used in Korea in lieu of monthly rent, has risen to stand at 50 percent of the purchasing price of an apartment in Seoul. The national average is 60 percent, with Gwangju leading all major cities and provinces at 77.6 percent. When renting becomes nearly as expensive as purchasing, renters naturally start thinking about buying to secure housing stability and amass home equity. But what level of jeonse would be the trigger?
The answer, of course, varies among would-be homeowners because of their individual considerations but a Samsung Economic Research Institute’s analysis of past jeonse to sales price ratios provides a general approximation of when jeonse prices begin to ignite buying sentiment.
Since the end of 1998, three distinct cycles are evident in the ratio: A rise that peaked in October 2001; a prolonged slide that bottomed out in January 2009; and the current upward push. At its apex in October 2001, the nationwide average ratio was 69.5 percent and Seoul 64.6 percent. In this period, jeonse-based housing was extremely difficult to secure as jeonse prices skyrocketed by 69.7 percent nationwide and 83.7 percent in Seoul. Meanwhile, sales prices rose by just 23.9 percent and 36.5 percent nationwide and in Seoul, respectively. The rise was partly due to government promotion of monthly rent and jeonse price stabilization measures as jeonse prices recovered from their deep plunge after the 1997 Asian financial crisis and surged.
The downward phase lasted 87 months from October 2001 to January 2009. During this period, the growth in homes prices - 70 percent nationwide and 109.5 percent in Seoul - far exceeded that of jeonse prices, 26.1 percent nationwide and 20.1 percent in Seoul. Thus, the jeonse-to-sales price ratio declined from 69.5 percent to 52.3 percent nationwide, and from 64.6 percent to a record-low of 38.2 percent in Seoul. This period saw a mixture of government measures. Due to galloping prices on remodeled apartments that began in 2002, the government stiffened efforts to stabilize housing prices.
The current upward phase that started in January 2009 has seen jeonse price growth take the lead again, rising 38.5 percent nationally and 35.8 percent in Seoul as the global financial crisis and euro zone debt crisis fueled economic certainty and constrained house buying. Sales prices have risen 14.9 percent across the country but remain muted in Seoul, where they remain 3 percent off the pre-crisis level.
By dividing the ratio into four ranges, we can determine when jeonse prices become a catalyst for buying sentiment. The ranges consisted of below 50 percent, 50-55 percent, 55-60 percent and over 60 percent. The analysis suggests that the current jeonse-to-sales price ratios are not high enough to bring relief to the housing market over the short term. In particular, in Seoul, where the housing market slump is most pronounced, the jeonse price is 54 percent of the sales price but historical patterns show that it must rise to 60 percent to begin to be a motivating factor. Considering current sentiment and conditions this is possible because sales prices in Seoul probably will remain flat.
Before the December presidential election there was speculation about higher housing prices but the focus on the economic front does not bespeak a significant hike in home prices. Since housing accounts for approximately 10 percent of consumer outlays, policy will focus on controlling rather than promoting price growth.
This does not mean policy makers will want to see the housing market improve. After all, the robust home sales would be a welcome development to promote sluggish economic growth. But the fate of various government proposals to stimulate the housing market is unclear. Most of the measures proposed to revive the market (including the abolition of the maximum price for newly built homes and abolition of acquisition taxes on multiple home owners) must pass through the National Assembly, and it is still uncertain if legislators will act on them.
Finally, concerns are growing over the situation regarding “house poor” due to a contraction in the real economy and an increase in overdue mortgage payments. This refers to people who are living beyond their means because they spend such a large share of their income on mortgage payments, property taxes and other home-ownership costs, leaving them with barely enough to get by.
The share of non-performing loans in household loans increased from 0.71 percent in March 2012 to 0.8 percent in September, while the overdue rate of mortgage loans rose from 0.61 percent in December 2011 to 0.74 percent as of the end of September. This suggests many people cannot afford to purchase a home.
* The writer is a research fellow at the Samsung Economic Research Institute.Visit www.seriworld.org for more SERI reports.
By Park Jae-ryong