Controversy over housing supply

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Controversy over housing supply

Earlier this week Yoo Il-ho, the newly nominated finance minister, became the center of a controversy even before he took office, after saying there is no oversupply in the housing market.

But it seems even market experts are split on whether he’s right.

This year 517,398 units of new apartments were up for presale. These are apartments that are on sale before they are completed.

Furthermore, construction of 700,000 apartments has been approved. For the presale of the apartments, that’s a 47.5 percent increase compared to the previous year. And for the construction approval it is the first time since 1990 that the government has given the green light on such a large number of apartments.

On both accounts it’s an all-time high. As a result, there have been growing concerns of an oversupply of housing units, which could result in creating panic, not only in the real estate market but could also in the financial market, especially as asset value could plummet.

However, market experts say that it is too early to tell whether the supply and construction of such a high volume will be a threat to the market’s stability.

The finance minister nominee doesn’t consider the current situation a threat largely because he believes there will be strong demands for apartments in the real estate market.

When celebrating his 100th day as the Minister of Land, Transport and Infrastructure in June this year he told reporters that at first he was concerned about oversupply. “However, most of the apartments that are supplied are being consumed in the market,” Yoo said.

Therefore, no matter how many apartments are provided, the market has the capability to absorb them.

As of the end of October, there were 32,221 unsold apartments nationwide. That’s a 0.2 percent decrease from the previous month and a 22 percent drop compared to the end of last year.

Although unsold apartments have risen in the greater Seoul area for the first time in four months, it barely grew from the previous month at 0.2 percent.

“As housing supplies shrunk since the global crisis of late 2008, demand for apartments has been building up over the years,” said Son Jae-young, real estate professor at Konkuk

“Most of the apartments that have been sold have been purchased by such demands.”

Some say that the Yoo is trying to calm oversupply concerns that he himself unknowingly started.

In April, while he was the head of the Land Ministry, he strongly advocated easing mortgage loan regulations, namely the loan-to-value (LTV) ratio and the debt-to-income (DTI) ratio. As a result, eased regulations on housing loan regulations that were supposed to have ended in July were extended for another year.

“If the LTV and DTI regulation easing ended as it was supposed to at the end of July, the apartments on presale would have decreased significantly,” said an official in the housing market, who requested anonymity. “Consequently, Yoo provided the lead to the recent oversupply controversy.”

But will the market be able to cover all of the apartments that will be available as Yoo expects?

The real problems come when people start moving in at the newly built apartments all at once.

Most of the presold apartments are expected to see people moving in between 2017 and 2018.

According to real state information provider, Budongsan 114, it expects 320,000 tenants to move into their apartments in 2017. That’s 60,000 more than this year. Additionally in 2018, 450,000 people are expected to move into their apartments.

Such a large numbers of apartments being occupied within a short time span could stabilize the jeonse or long-term deposit rents shortage. Demand for new apartments could fall and some apartments could have trouble finding new buyers or tenants and some might be left empty. Areas that are geographically far from Seoul and the surrounding regions could be faced with an increasing numbers of empty apartments.

“Some areas like Daegu were oversupplied last year and once the relocations take place, the number of empty houses could increase,” said Kwon Dae-jung, Myongji University professor on real estate.

Chae Mi-ok, head of the Korea Appraisal Board’s real estate research institute estimated that the number of apartments that will likely remain empty in 2017 will amount to 50,000 units.

In a recently released report, Chae said the maximum numbers of apartments that needs to be supplied annually is 450,000. But in 2017 there will be 500,000 apartments available in the market, leaving 50,000 units vacant.

In the greater Seoul area it will account for half or 25,000 units.

“To minimize the fall of apartment values resulting from an increase in vacant apartments, there is a need to make appropriate management of apartment supplies,” Chae said.

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