Unlocking real estate demand

Choi Young-jin

The shockwave from the Sewol ferry tragedy has been great. It has put Korean society in a state of collective panic and depression, even taking a toll on the economy. The real estate market also came to a standstill. Signs of a fledgling recovery vanished. Housing transactions in the Seoul metropolitan area fell 2.1 percent in April from the previous month. Seoul was hit hardest with the number down 5.3 percent. Housing transactions in three wealthy districts - Gangnam, Seocho and Songpa - in southern Seoul were down by as much as 22.5 percent.

The plunge had pundits and industry observers wondering and anxious. The government’s bombshell announcement that it would tax some rental income might have been a spoiler. The pall from the April 16 ferry sinking likely weighed on the real estate market, as well. If the lethargy goes on for long, the housing business could fall back into a slump. It’s a pity that all the stimuli from the government proved in be in vain.

The Hyundai Economic Research Institute recently released a meaningful report. It parsed the implications from the estimate of households that can afford to purchase homes and found hopeful signs of solid housing demand that could pick up with sufficient additional stimulus.

According to the report, 5.69 million households can afford to purchase a home. That number accounts for 31.3 percent of the country’s households. It suggests three of 10 households would be potential buyers of homes if the market shows strong signs of revival.

The market could strongly rebound if it could attract just 10 percent, or 570,000 families. A total of 880,000 households were involved in housing transactions last year.

Moreover, there are an estimated 1.44 million wealthy households that could afford to own a house, but choose to rent. A boom would be created if the market could somehow persuade these wealthy tenants to purchase property.

How reliable is this report? The statistical office compiles data on the state of households’ financial welfare annually from 20,000 families who live in mortgaged homes or rent to estimate their financial assets, income, home ownership, value of their home, mortgage loans, rent deposits, will to purchase homes and ability to afford mortgage payments. The Hyundai research institute estimated the number of potential homebuyers from the data. The government classifies potential demand for homes largely from higher income categories, but the Hyundai data included household debt and ability to repay.

To draw figures on potential demand, the institute first picked out households that can afford to repay the principal and interest on mortgage loans. The debt-to-income ratio of these households - total debt as a percentage of income - has been estimated at 20.8 percent. The ratio suggests the debt obligation of these households is not terribly burdensome. The research institute combed out potential buyers from these households. Their average debt-to-income ratio was just 4.4 percent. The institute identified them as potential buyers.

If these households purchase new homes, their debt-to-income ratio would shoot up to 11.6 percent. But spending slightly over 10 percent of income to service loans would not drastically hurt their household economy. Their share is far below the 20.8 percent of the broader category.

But the question is, “Will these families choose to buy a new home with their available cash flow?” Of potential buyers, 55.8 percent, or 3.17 million households, answered that they would be interested in investing in real estate under the right circumstances.

Financial assets of these households living in or around the capital area averaged 252.7 million won ($247,333) and 113.2 million won for those in other areas. With the help of a mortgage, they could afford to purchase homes.

Based on last year’s records, the average home value was 318.3 million won in and around the capital and 147 million won in other areas. The money and supply price are compatible. The trick is turning the potential demand to real demand.

What is necessary are tailored actions and policies for consumers. There are many who do not consider owning homes because they have no information. The government could consider arranging consulting services for them. It also could encourage lenders to expand cheap mortgage loans for first-time buyers or increase publicly-backed mortgage loans.

It also should ease regulations to increase interest in the business of renting among the rich as well as develop rent-only complexes to offer an attractive and stable income source.

JoongAng Ilbo, May 19, Page 33

*The author is a reporter specializing in real estate affairs.

By Choi Young-jin