Alarming signs of rebounding apartment prices

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Alarming signs of rebounding apartment prices

Published: 09 Jul. 2024, 19:52

Kim Chang-gyu
The author is the economic news editor of the JoongAng Ilbo.

The real estate market is heating up. According to a Korea Restate Board posting, apartment prices in Seoul gained 0.2 percent in the first week of July from the prior seven-day period, the strongest in 33 months. Apartment values in Seoul have been on the rise for the 15th straight week. Apartment prices in all 25 districts of Seoul have been trending upwards for five consecutive weeks. The heat has spilled over to the greater capital region, fueling the increase in the residential property value in the capital area and slowing the fall in non-capital regions.

Trade activities reflect the market trend. At the beginning of the year, the monthly apartment trade in Seoul stopped at 2,500 to 2,600 units. In May alone, nearly 5,000 units — 4,978 to be exact — changed hands. The volume could top 6,000 units in June. The last time the monthly apartment trade volume exceeded 5,000 was in May 2021 with a record of 5,045. The freeze started to thaw this year. A new apartment complex offering 400 units in Gwacheon, south of Seoul, drew over 100,000 bidders.

Migrant shoppers began to join the spree. Potential buyers outside the capital region are flocking to the area. Non-capital residents snatched up 22 percent of apartment offerings in the first five months of the year, exceeding the 21-percent share during the last housing price appreciation period of January-May 2021. Outsiders buying apartments in Seoul that numbered 700 in March topped 1,000 in April. The activity in and around Seoul came at the loss of other regions. Outsiders made up just 17 percent of apartment trade in non-capital regions during the January-May period, the lowest since 14 percent in 2006.

The uptick in real estate market indicators mirrors expectations of appreciation in apartment values based on brimming hopes for the interest rate to go down in the second half of the year. The headline consumer price index added only 2.4 percent in June against a year-ago period, the lowest since June last year. The easing inflation rate builds up the rationale for the Bank of Korea (BOK) to shift away from its restrictive stance, along with a renewed bet on a rate cut by the U.S. Federal Reserve in September upon signs of a slowdown in job data. Adding to the upside for the housing market are the shortfall of new supplies and a tightness in the rent market that fueled demand for housing by those without homes.

The problem is that most home buyers must rely on loans. Household debt already nears 2,000 trillion won ($1.4 trillion), acting as a ticking time bomb for the Korean economy. Still, the government offers state-backed mortgage loans and hesitates to put the lid back on loan limits.

Liquidity has become lush as a result. Even as the benchmark rate has stayed unchanged, banks ticked their mortgage loan rate lower. The average mortgage rate fell to 3.67 percent as of mid-June from 4.16 percent in December, causing a cascade in household loans.

The outstanding loans to households by five major commercial banks stretched by 5.34 trillion won in a month — the largest monthly gain in three years — to 708.57 trillion won in June.

Despite the fact that credit-based personal loans decreased by 214.3 billion won, mortgage loans surged by 5.85 trillion won. In just four days into July, household loans extended by five bank majors added 2.18 trillion won.

The delinquency rate has also risen. The household delinquency rate in bank borrowings reached 0.4 percent as of April, compared with 0.34 percent in the year-ago period. The share of loans past due at savings banks hit 8.8 percent at the end of March. The share was 2.5 percent in 2021, 3.4 percent in 2022 and 6.6 percent in 2023. The price for apartment ownership lands squarely on the middle class. In the first quarter, median-income households spent an estimated 40 percent of their income to afford the median-value apartments they purchased with loans.

The briskness of the apartment market in the capital area is out of sync with the dreariness of underlying economic fundamentals. The domestic demand remains sluggish due to high interest rates. The external front is flush with uncertainties from rising oil prices due to tensions in the Middle East and apprehensions over the outcome of the U.S. presidential election. A debt-financed housing boom is untimely and aggravates financial risks. Authorities are scrambling to regulate banks, but the ambiguity in the government’s stance only feeds confusion in the market. A debt-fueled housing market is bound to collapse.