Get real on real estate

Signs of a fledgling recovery in the real estate market that were seen after aggressive new economics chief Choi Kyung-hwan came into office have faded away. Sales of pre-construction apartment lots drew interest from possible buyers, but prices of existing supplies remain stubbornly unchanged.

The encouraging pickup in transactions has evaporated. The sky’s the limit for jeonse prices. Offers are rare. Even as jeonse prices hover above 70 percent of the home value, few are interested in actually buying or selling an apartment. In Seoul, jeonse cost is tantamount to more than 80 percent of the home value, but most prefer to live on jeonse rather than adding a little more to buy the residence.

Why? The answer is simple. No one believes home prices will go up. If the value of a house one has bought does not rise, it would cost the homeowner more to live in one’s own house than a rented home. If the person puts the house out on rent, he or she would lose money.

To give a more detailed example with figures, let’s say you live in a home valued at about 1 billion won, around $900,000.

The living cost could be compared to the estimated yield one would get by putting the money in a financial product. If the product yields 5 percent annually, you could calculate that it costs about 50 million won a year, or 4.17 million won a month, to live in the home you purchased.

If you live in the same home by paying a jeonse of 700 million won, or 70 percent of the home’s value, the housing cost comes to around 35 million won a year or 2.92 million won a month. The simple math shows that it saves more living on jeonse.

Living on jeonse is, of course, unstable. You may have to move every two years when the contract ends or pay more to stay. Still the housing expense is much smaller. The cost goes up when including the annual property tax and maintenance or repair expenses.

This is why jeonse offers are scarce in the market and prices are sky high. In theory, jeonse prices should be equal to or higher than home prices. For homeowners, they must be able to profit after counting expected returns from home purchases, property tax, depreciation cost, and maintenance and repair expenses. Korea has a unique rent system that was drawn up in the past when demand far exceeded supply, home prices were on the rise and it was difficult to get mortgages. It is a system where money was made when home prices jumped after purchases.

But when excluding the factor of a rise in home values, there has become no need to buy a house. When this belief became commonplace, jeonse supplies quickly disappeared and resulted in a dire shortage and spike in prices. Jeonse sharply appreciated from 2012 when the housing market entered a slump. The price rise came after expectations for rises in housing prices began to fizzle out. Homeowners instead have switched to monthly rents to lessen losses. The share of monthly rents is on the increase as they offer better returns from home investment.

Monthly offers are increasing and prices are falling. Monthly rent prices are expected to come to a settlement near the break-even point in the cost of homeownership. If home prices do not change, all homes - whether they are self-owned or rented out on jeonse or on a monthly basis - are replaceable at a certain level when translated into housing expenses.

Deputy Prime Minister Choi lifted various regulations to persuade jeonse tenants to buy homes to spur the market and send home prices higher.

It is the typical stimulus policy used in the past. Nothing can immediately vitalize the economy faster than a real estate boom. But things have changed. Housing demand won’t increase due to a reduced population from aging and Korea’s low birth rate. No stimulus will fan real estate prices.

If prices do not appreciate, few will be motivated to buy homes. The pitch to spur people to buy homes through easier mortgage restrictions and cheaper rates has failed. Such policies will work no more. The government is still hopeful that the real estate market will pick up once all the deregulations and stimuli measures get National Assembly approval. But they cannot reverse the structural changes in the domestic housing market.

The government needs to keep abreast of the times and change the goal in real estate entirely. It should graduate from its obsession with housing prices and redirect housing policy to ensure home security for the people. Instead of glaring at price tables, authorities should come up with ways to reduce housing expenses for the people.

People also should dismiss the dream of owning their own home. It doesn’t matter who owns the place if we can go on living in it at an affordable and stable price. More and more people are moving to homes that cost less to live in.

The popularity of monthly rents and the shortage of rent supplies underscores that the market is moved more by actual living costs. President Park Geun-hye should not only increase private jeonse supplies, but also promote individual rental businesses. Retired people whose sole assets are their homes should be able to make living through rental income.

JoongAng Ilbo, Dec. 3, Page 32

*The author is an editorial writer of the JoongAng Ilbo.

by Kim Jong-soo