Presales of new homes ignite a feeding frenzy

Home > Business > Industry

print dictionary print

Presales of new homes ignite a feeding frenzy


Real estate brokers and applicants of apartment units on presale wait for the presale winners to be disclosed near midnight in front of a show house for a Xi-brand apartment complex to be built in Dasan New City in Namyangju, Gyeonggi, on June 8. As soon as the winners were announced, the site turned into a sales market for apartment unit purchase rights. [HWANG EUI-YOUNG]

Cash is barreling in to the new apartment presales market. While the country is in the economic doldrums and existing home sales are on a decline, the presales market is overheated with people lined up to buy.

Construction companies are aggressively supplying new apartments, intensifying concerns of an oversupply in the nation’s housing market.

According to the market intelligence firm Real Estate 114, 143,000 units of soon-to-be built apartments were sold this year through last month, similar to last year’s output through the same date.

More than 470,000 additional apartment units are scheduled to be finished by the end of this year. That supply quantity is smaller than the 510,000 units supplied last year, but it is still 44 percent greater than the average annual supply of 330,000 apartment units based on data from 2011 through last year.


When concerns about an oversupply in the market hit the industry last year, there wasn’t much worry because the chances of an interest rate hike here grew following a signal from the United States Federal Reserve that it would raise its interest rates.

The government also announced it would tighten assessments for mortgage loans this year, so builders expected new supply to drop off.

However, unlike their forecast, a U.S. interest rate hike has been postponed, and exceptions have been applied to the strict guidelines proposed by the government for mortgage-backed loans, pushing up sales in the new apartment presale market.

Guidelines for mortgage-backed loans included prioritizing borrower’s income over collateral and requiring repayment of principal and interest at the same time rather than giving a grace period of interest-only payments.

For tighter screening, mortgage lenders were asked to apply an interest rate stress test to see if a borrower could afford payments even if the benchmark rate rose.

When the guidelines were actually implemented beginning in February in Seoul and in May everywhere else, group loans, the most prevalent way of getting mortgage loans for those attempting to buy to-be-built apartment units on presale, were exempted.

By using group loans, contractors can borrow 60 to 70 percent of the presale price, about the amount of middle money, without personal screening as long as the construction company gives a guarantee for the loan. As the company directly negotiates interest rates with banks, it often offers more favorable deals to contractors.

According to Real Today, a real estate information provider, 97,000 apartment units have been sold in presales with an average of 12.7 people bidding per unit in the first round of sales.

Sales of already built houses showed a stark contrast. House transactions tumbled 25 percent year on year to 375,000 deals through last month and housing prices only rose 0.09 percent. Stricter rules on mortgage-backed loans further deterred transactions.

Purchase right sales at a premium

As to-be-built apartment sales heated up, purchase right resales also became active with big premiums added on to the original presale price.

Near midnight on June 8, a line of over 300 people stood waiting in front of a show house at an apartment complex in Dasan New City in Namyangju, Gyeonggi, as presale winners were soon to be disclosed. People in line were applicants for apartment units on presale and real estate brokers preparing for presale rights transaction.

As soon as the results were posted online, brokers started calling out, “How about a 30 million won [$25,000] premium on the ninth floor?,” or “Anybody with purchasing rights to an 84-square-meter [904-square-foot] unit?” The brokers and purchase right winners kept negotiating until 2 a.m.

A similar scene took place on June 17 at Dongtan 2 New City in Hwaseong, Gyeonggi, as people were lined up in front of the show house of the Hillstate apartment complex. Teams of real estate brokers consulted with visitors and said, “A purchase right for a complex unit will earn you a 30 million won premium if you resell it,” while handing over their name cards. Some touts were not even officially registered brokers.

The presale of unbuilt apartments operates under a lottery system in which only those qualified to apply can make an attempt. Priority is given to those who do not own a house and those who regularly save money in a savings account designated for presale unit applications.

“Applying for a presale unit purchase is not such a big financial burden because it only requires deposit money, but if applicants land an apartment unit, they can resell it with over tens of millions of won premium, and that’s why the market is rapidly expanding with demand,” said Park Won-gap, a senior real estate analyst at KB Kookmin Bank.

The purchase right sales have become a new business for some people in Korea, with what amounts to a black market immediately after presale results are disclosed at midnight.

From January through May, rights sellers in Seoul could earn on average a 26.45 million won profit through their sales, 19.52 million won in Gyeonggi and 15.01 million won in Busan. Based on 54,187 purchase right sales that took place during that period, on average a 14.64 million won ($12,481) premium was added to the original presale price of an apartment unit, Real Today data showed.

Potential risks of presales market

Real estate market analysts who have said “this year will be different” are beginning to show worry as presales soar. “Possibilities have grown for a housing market oversupply to become a reality, and mortgage-backed loans may become bad debts,” said Song In-ho, an analyst from the Korea Development Institute.

Presold houses lead to an overall increase in the housing supply when people start moving into the apartments two or three years later, when construction is completed. Group loans for these new units are rising quickly, accounting for over half (5.2 trillion won) of total mortgage loans (9.6 trillion won) lent in the first quarter this year.

Borrowers are not obligated to pay back loans during the apartment construction period under group loans; once the construction is finished, however, a massive number of people may abandon their rights to move into the unit due to the inability to pay back any more debt.

Another problem is with the rising price of these units on the market for presale. According to Korea Housing & Urban Guarantee Corporation, the average price of apartment complex units for pre sale was 9.22 million won per 3.3 square meters, which is a 7.05 percent increase year on year. The capital saw a steeper rise of 12.64 percent to 20.67 million won.

Reconstructed apartment complexes such as new Xi-brand apartment complex in Banpo-dong, Seocho District, southern Seoul, are leading the recent price hikes in the presales market.

The presale price for a Xi apartment unit in January was 42.9 million won per 3.3 square meters, but the offer still found 37 people bidding on each unit.

Raemian-branded apartment complexes in Gaepo-dong and Ilwon-dong, both in southern Seoul, were also highly favored by presale applicants even though each unit cost more than 37 million won per 3.3 square meters.

Analysts warned, however, that these price levels might mean a purchaser is not getting value for money.

“In the past, expensive new apartments would push up property prices in the surrounding area, which was a win-win for residents in the area, but in situations where the presale market and the existing housing market are moving on different tides, high presale prices may be risky,” said Im Chae-woo, a real estate specialist at KB Kookmin Bank.


Log in to Twitter or Facebook account to connect
with the Korea JoongAng Daily
help-image Social comment?
lock icon

To write comments, please log in to one of the accounts.

Standards Board Policy (0/250자)

What’s Popular Now