Glimmer of hope in stalled real estate market

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Glimmer of hope in stalled real estate market

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A signboard in front of a realtor at a new town in Eunpyeong, northern Seoul, plastered with apartments listings for urgent sale at discounted prices. By Park Jong-geun

businThe Park Geun-hye administration’s announcement last week that it will be unveiling measures that would help boost the real estate market was already expected in the market. The measures are scheduled to be announce at 2 p.m. today.

Yet the news was welcoming as the real estate market in Korea has been stalled since the global crisis of 2008. Reaffirming that the government would act on the crisis gives the slightest hope as the real estate market is in a desperate state.

The situation in recent months hasn’t improved visibly, although the government’s proposal for extending the tax benefits on apartment transactions has been extended for another six months.

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Previously, under the Lee Myung-bak administration, the acquisition tax rate was cut in half while the tax on profiting from selling apartments was exempted between September and December.

As a result, the real estate market slightly recovered during these months.

The situation, however, froze quickly as the tax benefits expired at the end of last year and failed to extend until the lawmakers from both ruling and opposition parties agreed to do so earlier this month.

“There have been a few calls lately, but in most cases homebuyers and sellers are waiting until the government measures are released,” said a realtor in Jamsil, southeastern Seoul.

According to the industry, Jamsil is relatively better than in other areas, especially since there are several apartment complexes that are newly reconstructed.

“In the case of Daechi, Gangnam, [which still remains one of the most expensive neighborhoods in the country] real estate transactions are on complete hold,” the realtor added.

In fact a realtor in Gaepo, Gangnam, said even the rare calls that were coming in until last year have entirely stopped.

Housing transactions in February amounted to 47,288. This is not only 14.2 percent less than a year ago but also a 24.9 percent drop compared to the average transactions made in February in the past five years.

Between 2008 and 2012 the average housing transactions in February was 62,997, according to the Land Ministry.

Selling apartments is even harder for people who purchased them with loans.

A 34 year-old homeowner, going by Choi, hopes to sell the apartment that he’s been renting out. But if he does he would have to suffer an even higher financial burden. Five years ago he bought an apartment for 370 million won ($ 332,943) with a 120 million won mortgage loan.

However, the value of the apartment has fallen to 300 million won today. If he wants to sell the apartment to a customer, he would have to pay back the current tenant who has been renting the apartment for 220 million won of jeonse, or long-term deposit, to move out. That means that he would in total need 340 million won - repaying the current tenant and paying back the loan.

If he sells, Choi is not only going to suffer a 70 million won loss, but he also needs 40 million won to sell the apartment.

“It’s just mind boggling that I can’t sell the apartment because I don’t have the [40 million won] money,” Choi said. “I’m putting some of my hopes on the real estate measure that the government said they would announce.”

The market has been busy trying to figure out what measures the government could possibly employ.

Other than the tax benefits offered in the latter half of last year, previous measures, including increasing the supply of housing units for low-income families dubbed bogeumjari, failed to boost the industry. Market experts say until now there haven’t been measures that would completely turn the situation around and in most cases it was disappointing.

One of the ideas that the government is said to be fiddling with is cutting down on supply. This is an easy choice for the government since they have the authority to approve or disapprove construction projects.

Especially, the government considers the greater Seoul area as a problem.

As of the end of January, the number of unsold apartments in the greater Seoul area amounted to 34,000 units. This is an all-time high. The number slightly dipped last month to 33,674 units. But it still remains relatively high.
The Park government is now looking into significantly reducing the major projects, including new towns and housing projects for low-income families that the previous administrations have been pushing for. There are roughly 26 areas in Gyeonggi alone that haven’t broke ground yet. The total size of the combined area is 71.6 million square meters (17,692 acres).

Also, the new town project in Incheon was scrapped.

“The bogeumjari housing project [for low-income families] has good intentions,” said the new Land Minister Suh Seung-hwan. “However, it is also true that it has had a bad influence on the [real estate] market, such as making potential homebuyers choose [long term] jeonse, as they wait for the apartment values to further drop.”

Because the additional supply of housing units and the people living in bogeumjari are not wealthy, some neighboring area apartment values drop.

Another measure that the government may change is loan regulation.

Until now, the government has been strongly denying making any alteration to the loan regulations, including debt-to-income ratio or loan-to-value regulations, as it could only add to further expansion of household loans, which are already at a record 959 trillion won. But without stimulating demand, the real estate market would have trouble even making the slightest improvement.

Also, there are rumors that the government may scrap the comprehensive real estate tax that was created by the Roh Moo-hyun administration when the real estate market was at its peak. The Roh government set the unprecedented real estate tax to cool off the heated market that was largely led in the posh neighborhoods in Gangnam. Unlike the acquisition tax or the profit-gain tax, which are local government taxes, the comprehensive tax goes into the pocket of the central government.

However, scrapping the tax may be met with strong opposition, particularly from the local government, since the tax collected from the comprehensive real estate tax is used in supporting local governments.

Earlier this year, after the tax benefits expired, the move of extending these taxes was met with ferocious opposition from the local government, as it was a major tax revenue source.

Some market experts say if the government measures fail to reach expectations it could further deepen the crisis.

By Joo Jeong-wan, Lee Ho-jeong [ojlee82@joongang.co.kr]

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