Oversupply, prices hit sales of smaler homes

Sales of smaller homes, which were hot due to a lack of rental options, are starting to cool as supply increases and pre-sale prices rise.

Pre-sale refers to the listing of homes still under construction, a tactic used by firms to raise funds to complete the building project.

According to the Ministry of Land, Infrastructure and Transport, 34,068 homes across the nation failed to find a buyer during their pre-sale as of June, a sharp increase from May’s 5,926 unsold homes.

The majority were small-and-medium sized, or under 85 square meters (915 square feet). There were 18,860 unsold smaller homes in March, and the number steadily increased to 19,133 in May and 25,748 in June.

In contrast, the number of unsold homes over 85 square meters declined from 10,037 in March to 9,278 in April.

In May, that number hit 9,009 and slipped to 8,320 in June.

Smaller homes accounted for 65.3 percent of all unsold homes in March, and by June, they accounted for 75.6 percent.

Experts say smaller homes are failing to lure buyers and investors as their supply has recently exploded.

According to Realtor 114, a real estate portal, over 245,560 new homes entered the pre-sale market as of August 4, and of these, 93.2 percent or 228,847 units were small-and-medium sized.

“As supply [of smaller homes] has jumped, so has the number of unsold homes,” said Ham Young-jin, a senior researcher at Realtor 114.

Another contributing factor was construction companies, who took risks by building homes in less developed areas because of the revived interest in new housing.

Pre-sale of homes in these areas is usually hit the hardest when demand cools down.

“The supply of new homes in less desirable areas is also affecting the overall market, said Shim Kyo-un, a professor at Konkuk University.

There are also more housing alternatives to small homes, hurting smaller homes’ viability as investments. Officetels ? which can serve as both as an office and residential space -- and smaller apartments are more numerous than in previous years, industry insiders say.

The pre-sale prices of smaller homes have also gone up following a string of successes in the market last year.

In 2013, the average pre-sale price per pyong (36 square feet) of homes larger than 85 square meters was 12.8 million won, whereas the pre-sale price of smaller homes was 8.8 million won per pyong ? a difference of around 4 million won.

But that gap has closed rapidly. Last year, the difference in the pre-sale price per pyong of the two types was 3.42 million won, and this year, it’s fallen to 1.21 million won.

“Market players built a lot of smaller homes for 1 to 2 people because of their popularity … and the supply has now surpassed demand,” said Kim Duk-rye, an analyst at Korea Housing Institute.

“We will probably see more small homes remaining unsold on pre-sale markets”

The latest regulatory measures aimed at curbing borrowing by individuals and households with bad credit will also dampen the market, analysts say.

“Given the regulatory changes, we have to look at the market through the eyes of the potential buyers … if pre-sale prices are too high, market will have a hard time digesting the volume of such new homes,” Ham at Realtor 114 said.

BY PARK JUNG-YOUN, JOINSLAND [park.jungyoun@joongang.co.kr]