The trouble with houses
The author is an editorial writer of the JoongAng Ilbo.
The chill in Korea’s real estate market has led to a flood of undersubscriptions in new apartment offerings. According to the Ministry of Land, Infrastructure and Transport, the number of apartments unsold after their completion hit 17,981 units nationwide as of the end of January — up 7.4 percent from the previous month and the highest level since the record of 18,342 units in September 2014.
The lackluster demand was expected. Apartment prices have been skidding since the government implemented its toughest set of real estate cooling measures on Sept. 13 last year. Home buying has also become difficult due to rising interest rates and higher taxes from reforms in the appraisal of property values. Except for exceptionally popular neighborhoods in and around the capital, demand for new offerings has also turned tepid. Few would want to buy homes when the prospects for higher home prices are dim.
The sluggishness has been more severe in non-capital regions. Unsold apartments totaled 19 units in Seoul, 448 in Incheon and 2,514 in other parts of Gyeonggi. The vacancies stood out in other parts of the country, numbering 3,045 in North Gyeongsang, 3,030 in South Gyeongsang and 3,014 in South Chungcheong.
Most of the unsold homes are apartments, as they take up 60 percent — 10 million units as of 2016 — of Korea’s housing supplies. Unsold units account for 0.15 percent of apartments, significantly lower than the 2.8 percent home vacancy rate in the United States. The share is even smaller when it is restricted to Seoul and nearby areas. Empty homes in Seoul have stopped at 27 units, including those still under construction.
These offerings were available three years ago, when the Park Geun-hye administration offered various incentives on top of record-low interest rates to encourage people to buy homes as a measure to stimulate the economy. The middle class invested in homes to prepare for their old age and people outside Seoul hunted for extra homes nearby the capital to make profit. Those who had not been grabbed during the peak days would have had no investment appeal or were too expensive. The unsold ratio remains low around the capital because people rushed to capitalize on the cheap and easy loan environment to invest in real estate.
Yet Korea’s future 10 years onward is not bright. The young population is thinning quickly. The fertility rate fell below 1 for last year for the first time. The rate in the sub-1 territory is the first in the world — and the lowest even for the OECD countries. As a result, it will become increasingly difficult for homes in Korea to find tenants.
Automation and polarization of wealth are additional factors in the housing market. Korea ranks among the highest in terms of robotic usage and automation, far higher than China and Japan. Mainstay exports, such as semiconductors and steel, are produced largely by machines. The ratio would have to go higher for Korea to maintain competitiveness. In short, as fewer people find work at high-paying large companies, it remains questionable how many people will be able to afford apartments and rents at current rates in the future.
In the longer run, apartment prices will have to come down. Yet few apartments are empty around the capital. The rise in home values over the past few years has been faster than the gross domestic product gains, partly due to ill-timed or inappropriate monetary policies. The paradox will inevitably be corrected. The thinning population and wealth inequalities will certainly cut into notoriously inflated home prices. More apartments should become empty in order to stop feeding home buyers with wishful thinking and normalize the market once and for all.
Foreign media has been warning of risks in shadow financing due to the bubbles in China’s real estate market. It could become too late if the debt-financed property market collapses. The risk from China’s potential housing market crash could translate into heavy national cost.
The Korean market is exposed to such dangers. Household debt, which has topped 1,500 trillion won ($1.3 trillion), poses a potential danger to the national economy. The government must devise a farsighted housing policy so that people stop viewing homes as their future wealth.
JoongAng Ilbo, March 4, Page 28