Real estate pipe dreams

The Korean real estate market these days is in an entirely new ball game. Transactions have picked up, but prices are stalled. According to the Ministry of Land, Infrastructure and Transportation, about 1.05 million homes changed hands last year. It is the first time home transactions exceeded 1 million units since 2006. The recovery continued into this year. Home trades have been active in and around Seoul, which is the best barometer for real estate market sentiment. Sales of homes totaled 12,990 units in Seoul and 37,502 in satellite cities in February. The volume is up 10.4 percent and 4.3 percent, respectively, from the same period a year ago despite the Lunar New Year holiday.

Typically, if sales pick up, prices go higher. Prices cannot rise if there is no demand. The market regained some life and yet prices are stubbornly subdued. This phenomenon puzzles market watchers. Prices of apartments in Seoul rose 1.2 percent in February, according to KB Kookmin Bank, which tracks apartment prices. The rise beats the consumer price gain of 0.5 percent in February, but nevertheless is pretty pitiful considering the recovery in transactions.

A closer study of the details of the sales helps solve the mystery a little bit. In February, about 580 homes were traded in Gangseo District, a southwestern part of Seoul, up 44.6 percent from the same month in 2014. Gandong District in the southeastern part saw an increase of 26.8 percent, Jongro District 21.5 percent, and Seodaemun District 20.5 percent. The double-digit growth is mostly outside the Gangnam area, the usual real estate hotbed. Trades in the three most expensive neighborhoods - Gangnam, Seocheo, and Songpa districts - plunged 23 percent on average from a year ago. Sales of apartments only increased 3.2 percent. Those of semidetached homes and single-structure multiresidential buildings grew 5.9 percent. Deals in detached or multiresidential houses rose 11.8 percent. More than half of the deals were made in small units of 61 to 85 square meters (657 to 915 square feet). New purchases were mostly made in neighborhoods north of the Han River where property prices are cheaper, multiresidential homes rather than apartments, and smaller dwellings rather than big ones.

The real factor behind the new phenomenon can be found in skyrocketing rents. Due to an upward spiral in rent fees, tenants have decided to buy affordable homes through mortgage loans. Bank loans have become cheaper with the key interest rate lowered below 2 percent. The spike in mortgage loans further supports the observation. Mortgage-related loans at commercial banks grew by the largest monthly volume of 4.2 trillion won ($3.76 billion) in February. In short, the real estate market now is shaped by real demand rather than investment or speculation.

But the government and construction companies do not seem to be all that happy with the situation. A real estate market moving on real demand is unimpressive in the economic context. There is nothing better than a vibrant real estate market to boost domestic demand. Capital flows in upon signs of activity and heat in the market. One tends to lose good sense and judgment when caught up in the fervor to trade. One feels left out and anxious if everyone else goes after something. You end up joining the crowd. So begins the game of dumb, dumber, and the dumbest. You must find a dumber person who will buy your home at higher price than you did to make a profit.

The government and construction companies are trying to exploit people’s desire to make fast and easy money by drumming up steam in the real estate market. They have encouraged the Bank of Korea to push the key interest rate to an unprecedented level of below 2 percent and scrapped various mortgage-related loan regulations. The media is playing along with the hype. News headlines exclaim, “Bid price for homes in certain area in Seoul jumped over 20 million won a day,” or “Landowners quickly withdrawing home offers,” and “Home deals reach 90 percent in certain areas,” to make the real estate market look sizzling hot.

At a time when low growth and low prices have become the so-called new normal, real estate prices alone cannot go higher. When you consider demographics, incomes, and home supply-and-demand factors, real estate prices will stay stable except for a few exceptions.

No matter how much the government tries, it cannot artificially heat up the real estate market. If it pushes too far, it will only end up with a backfire. What’s worrying is that the economic team under deputy prime minister for the economy Choi Kyung-hwan may be willing to take that risk. Choi and Yoo Il-ho, minister of Land, Infrastructure, and Transportation, are politicians close to President Park Geun-hye. They are expected to run in parliamentary elections in April next year. They have less than a year to make achievements during their bureaucratic gigs. They could be tempted to push ahead with immediate stimuli action.

But the choice is up to the consumers regardless of what the government tries. The U.S. monetary authority is poised to raise the benchmark interest rate in June. The Korean central bank cannot keep the interest rate at a record low of 1.75 percent if interest rates move higher in the United States. Consumers must think twice before taking out loans. Most importantly they must keep greed at bay. One could end up losing everything if he or she gambles. JoongAng Sunday, Mar. 20, Page 28

The author is the editor of business and industry news at the JoongAng Sunday.

by Kim Jong-yoon