To buy or not to buy?

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To buy or not to buy?

“Rent prices are skyrocketing,” said my brother, who is in his 40s. “I may have to think about buying a home.”

My elder brother in his 50s disagreed. He believed the time is right to sell his home to secure money for his old age.

Home values were the most heated topic during the family gathering this Lunar New Year. Prices for jeonse (long-term deposits) are now tantamount to 90 percent of home values in some areas. Home prices also rose 5 percent to 10 percent. Prices of new apartments in Seoul jumped 15 percent in just a year. Real estate transactions have picked up, reaching the largest number in 10 years. Construction companies are hoping for the best. They could use more work after a long slump in the real estate market. New apartment supplies across the nation will reach a record high of 350,000 this year.

The revival in real estate, however, is causing anxiety for people with and without their own homes. Even a fortune-teller cannot tell how the real estate market will perform. Home prices are affected not only by overall economic performance but also government polices and speculative sentiment.

There are some factors that can provide indications of the trend in prices for the next three years or more. They are incomes, demographic trends, interest rates and supply-demand conditions. When these fundamentals are weak, home prices can crash. For people who cannot make up their minds whether to buy or not, let’s study the status of these factors to gauge if an investment in property will be worthwhile.

The first is incomes. For prices to be sustained at current levels or go higher, there must be potential buyers willing to pay the current price. Income levels of people in their 30s and 40s, who are the main buyers of homes, are stagnant or falling. Their jobs are at risk and self-employed people are doing poorly. The younger generation of people in their 20s is in a more pitiful state. They cannot find jobs or must settle for low-paying contract work.

The house price-to-income ratio - the ratio of the cost of a typical housing unit of 100 square meters (1,076 square feet) compared with the country’s gross domestic product per capita - is dangerously high in Korea. The ratio is 10 times in Seoul, the second highest in the world after Hong Kong’s 13.5 times. An average working urbanite earns 56 million won ($51,000) a year. The average home price in Seoul is 560 million won, or 10-fold. A family in southern Seoul, the most expensive part of the capital, on average earns less than 100 million won a year. But the family’s home values are over 1 billion won - more than 10 times. They live in homes that are costlier than in New York (7-fold), London (8-fold), and Tokyo (7.5-fold).

The second indication is demographics. Korea’s working population will begin to thin from 2017. From 2018, the primary consumers in their late 40s will reduce spending. What we are headed for is the so-called demographic cliff. The baby-boom generation will be pushed out of jobs and join the ranks of unemployed retirees. They will have to save up and start looking for smaller homes.

The third factor is interest rates. The government has been encouraging mortgage lending by offering loans at cheap rates of 1 percent to 2 percent. A 500 million won loan carries an interest rate of 1.1 million won a month these days. People are tempted. But the catch with interest rates is that they can rise. If the U.S. Federal Reserve starts raising interest rates, Korea may have to move in sync. Interest rates of 3 percent may not seem much worse than 2 percent, but that 1 percentage-point increase boosts interest payments by 50 percent. Korean mortgages are risky because they are based on floating rates and mature in relative short terms of three to five years.

Finally, there is the supply and demand situation. Homes in and around the capital will be in short supply for the next three years or so. This is due to ongoing reconstruction and redevelopment of old apartments in southern Seoul. Following eased regulations, 88,000 homes in southern Seoul and 150,000 throughout the capital are subject to reconstruction. Because so many are torn down, families must find places to live until their new homes are ready. Due to a shortage in supply, rent prices in and around Seoul will continue to stay high over the next three years. Home prices could also go up. But one must not be fooled. Once people move into their new homes, supply will sharply rise. The bulk of construction of new apartment buildings will be finished by then. The moment coincides with the demographic cliff when people will start selling homes to move into smaller ones to save for old age. The result could be an ocean of empty apartments.

In conclusion, all the factors around home ownership are weak. There is another factor that can change the mood - economic revival and structural reforms. If the administration succeeds in its economic campaign and ends up increasing jobs and household incomes, home values can be sustained regardless of other factors. At the end of the day, the decision to buy a home is yours.

JoongAng Ilbo, Feb. 26, Page 28

*The author is head of the headquarters of the JoongAng Ilbo Sisa Media.

by Kim Kwang-ki

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