Prices have bottomed out

No Hui-sun

There were worries that the government’s measures to transform the rental market in February could spoil a recovery in the real estate market, which was in an early stage. The ferry disaster in April is feared to have cast an overall depression on consumer sentiment, including a fledgling recovery in the housing market. The question is whether the market can withstand these upsets or slip back into recession.

Homes are long-term investments because of taxes and the period of investment. They cannot be bought this week and sold the next. Potential buyers turned particularly cautious amid an increased risk of being house-poor - not being able to afford anything but their mortgage payment each month - or actually unable to pay the mortgage following the financial crisis. Buyers brood for a long time on the costs, residential environment and rental alternatives before they decide on a purchase.

Changes in the housing-market structure and economic uncertainties have affected consumer behavior and views on homes as assets. There are no longer many that naively believe home prices will rise. To gauge the prospects of the real estate market in the future, one must watch transaction volumes as well as prices to judge consumer sentiment and behavior.

Consumers have deferred home purchases because they feared losses from home devaluations. The home market began to improve from the first half of 2013 amid beliefs that home prices had hit bottom. Have weekly prices fallen that sharply in their average and volatility to have led to renewed concerns about the market? Apartment prices on average changed by 130,000 won ($127) across the nation and 120,000 won in Seoul per household per week against the same period in the previous month since August 30, 2013. The volatility was within 100,000 won nationwide and 370,000 won for Seoul. Even considering the biggest monthly fall of 90,000 won nationwide and 1.41 million won in Seoul throughout the year, the annual price decrease would be around 1 million won to 17 million won. Those are not that great against the average apartment value of 280 million won nationwide and around 540 million for Seoul.

The three-month volatility scale in home prices also suggests that home prices have been more or less stable at their average level. We therefore cannot conclude that home prices are heading down, pushing the market back into stagnation. The plateau in the housing trade reflects consumer sentiment on home prices. If a majority believes in further falls for housing prices, trade volumes should also decrease. But trade both nationwide and in the capital stayed above average in the first half of this year. The apartment trade in Seoul rose in April from the previous month despite the February announcement of new levies on rental incomes.

So what does all this mean for market prospects? Price corrections were smaller at home than abroad during the international financial crisis. Home prices here instead steadily corrected themselves in the span of the last five years. The volatility and danger of further price plunges has eased. What matters now is drawing demand into the market for cheap supplies in rentals and at auctions. To do so, consumers must feel more confident in investing again. Thankfully, the economy is expected to outperform previous years and grow nearly 4 percent this year.

The negative impact of the government’s plan to tax rental income has also been overstated. Resistance to it should be understood as being similar to the response years ago to demand transactions be done in people’s real names. Investment spirits could be damped at the start, but in the longer run actions to ensure transparency would help the market.

Once the market overcomes confusion and misunderstanding about new rent policies, the recovery pace can pick up. The housing price cycle has shortened to 30 months from the previous 50 months. Given its cycle, prices would have bottomed out during the first quarter of 2013. We may no longer see a real estate boom as in the past, but housing prices and trade will likely do better than before.

Translation by the Korea JoongAng Daily staff.

*The author is a research fellow of the Korea Housing Institute.

By No Hui-sun