New regulation cools a heated market

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New regulation cools a heated market

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A view of southern Seoul from the Korea International Trade Association’s headquarters in Samseong-dong, Gangnam District. Apartment prices, especially in southern Seoul, have gone down after the government announced tighter regulations on preconstruction purchases in hopes of curbing household debt. [JOONGANG ILBO]

Last month, real estate agencies around Sincheon Station in Jamsil-dong, southern Seoul, were struggling to sell apartments in three new complexes in the area.

Of the 15,000 units in llls, Ricenz and Trizium, realtors only managed to sell five in November, the result of government measures to cool an overheated market.

“This is the worst situation the neighborhood has faced since apartments were completed in 2006 and 2008,” said Lee Ki-choong, head of a real estate agency in the neighborhood.

The Seoul apartment market, particularly south of the river, has been frozen since the government tightened sales regulations on Nov. 3 in hopes of curbing an overheated market and rising household debt. More people have been purchasing apartments in the past couple of months, and that has led household debt as of the third quarter to reach a new record of 1,295.8 trillion won ($1.1 trillion). In just one year, 130.9 trillion won in loans and credit card payments owed have been added to the debt.

The exceptional growth of household debt has raised concerns, especially as a slow economy has kept down income growth. The government’s plans to discourage people from taking on more mortgages included restricting sales of apartments before they are constructed, a common practice in Korea.

The policies seem to be working as people have stopped hunting for apartments.

The number of units sold last month in the three Gangnam districts — Gangnam, Seocho and Songpa — amounted to 166, just 11 percent of the 1,472 apartments sold in October. It’s a notable decrease since October and November are considered one of the busy moving seasons.

As the buyers have stopped coming in, apartment prices that were enjoying growth in the last couple of months have ground to a halt. According to real estate information provider Budongsan 114, average apartment prices in Seoul last week remained unchanged compared to the previous week. It’s is the first time Seoul apartment prices have stopped growing in 37 weeks.

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Apartments in popular Seocho District saw prices drop 0.2 percent, while Songpa District’s prices have barely changed, inching down 0.06 percent. As prices retreat, some homeowners are offering their apartments for immediate sale below the market price.

An 84-square-meter (904-square-foot) apartment in Banpo Jugong 1 Danji saw its price drop from 2.6 billion won to the 2.4 to 2.5 billion won range. “After an apartment was asking for 50 million won less, I sent text messages to interested buyers,” a neighborhood realtor in Banpo-dong, southern Seoul, said. “But I haven’t gotten a single call.”

Things are not that different north of the Han River. An 84-square-meter apartment at Raemian High River in Seongdong District, northeastern Seoul, saw its value drop as much as 30 million won.

Experts say this is because many homebuyers are convinced that even if they buy an apartment, its price will not go up. In a recent survey of 4,000 real estate agents conducted by KB Kookmin Bank, the real estate exchange price outlook fell for the first time in nine months.

“Aggressive purchases of apartments are slowing because of uncertainties including the tightened sales regulation, the U.S. election results and the sluggish domestic economy,” said Lim Hee-yeol, head of the price evaluation team at KB Kookmin Bank.

“With various negative factors in November and no sign of good news visible, current market stagnation is likely to continue for the time being,” said Kwon Joo-an, president of the Korea Housing Institute.

But of course, there is a chance the market could stabilize after the winter, when homebuyers looking to move into new apartments, as opposed to purchasing for investment, will start to look into buying, said NH Investment and Securities real estate researcher Kim Gyu-jeong.

One study by the National Assembly Budget Office warns that while falling apartment prices might not have an immediate impact on the financial market, it could pose a threat later. If prices continue to tumble 20 percent, the amount of mortgage debt taken on by households, even after those with the highest risk sell all their assets at 70 percent of the current value, will total 28.8 trillion won.

Such a crisis from uncollected debt won’t have an immediate impact on the soundness of banks. In fact, if banks write off the debt as losses, it would only lower the BIS ratio, an indicator of financial companies’ soundness, by just 2 percentage points to 11.94 percent. The Financial Supervisory Service considers a safe BIS ratio to be above 10 percent.

The problem will come when falling home prices overlap with struggling businesses.

If businesses with loans run into difficulties on top of worsening household debt, the banks’ BIS ratio could drop to 11 percent. The situation would be more devastating for specialized banks like agricultural cooperative NH Nonghyup, fishery cooperative Suhyup Bank and the state-owned Industrial Bank of Korea and Korea Development Bank. Their BIS ratio could fall below the 10 percent threshold to 9.6 percent.

“When there are multiple impacts, we risk a bank run at specialized banks, and if the problems are not handled properly, they could spill over to other commercial banks and create a more chaotic bank run,” said Hyun Young-jin, an economic analyst at the National Assembly Budget Office.


BY HAN AE-RAN, HWANG EUI-YOUNG [lee.hojeong@joongang.co.kr]

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