Average Seoul Apartment Price Exceeds W500 million

9 Responses to This Entry

1. C.A. on April 22, 2008 @ 9:25 am

   Wow… I can remember a 14 pyong place a drive and 7-iron from Seoul station for W1,000,000 in 1993 and I thought that was awfully high.

   Thanks for the original Korean… I have my DLPT soon and that was a good review. I’ll be back in Korea in June…

2. Tero on April 22, 2008 @ 10:19 am

   <sarcasm>I guess real estate wealth has reached a reached a permanent high plateau in Korea, and I truly envy all those who live in these gold mansions in Gangnam.</sarcasm>

   Are the mortgages in Korea mostly recourse or non-recourse loans? There has to be a lot of people in Seoul up to their eyeballs in debt.

   A 500 million 30-year loan at 6.5% costs well over 3 million a month in payments. I guess people are still willing to pay that much (if they can) as long as they believe prices keep rising, but what will happen when they end up ‘underwater’ as is happening in the States?

   Can they just walk away, or will there be a class of permanent debt slaves?

3. Brendon Carr on April 22, 2008 @ 10:45 am

   Korean housing finance is, as always, a bit weird compared to the rest of the world.

   First off, unlike the US, the housing loan-to-value (LTV) ratio is limited to about half the value of the property; commercial banks are prohibited by the Financial Supervisory Service from loaning more. This doesn’t mean people don’t get greater leverage from somewhere else (merchant banks, insurance companies, etc.), but the “mortgage” loan only accounts for half the value of the property.

   So to buy a W500 million apartment, one would first need to amass W250 million or so in cash, then get a loan from the bank. That loan would be secured by a first-priority lien on the property, which means the bank’s exposure to loss is in theory relatively limited. A repossessed home sold at auction might be expected to get 50% of the “market” price in any case.

   Second, housing loans are rarely amortized. Banker friends have moaned about how hard it is to talk people into a fully amortized loan. Most Koreans prefer to take out a short-term balloon loan and make interest-only payments, and “pay” the loan by taking another loan when it matures (perhaps paying down some of the principal balance at that time), or by selling the property and taking profits.

   So the down payment on that average 850-to-920 sq. ft. apartment (usable floor space varies from property to property) is W250 million. Compare that to the starting salaries for college graduates—W1,500,000 a month is not uncommon, and W3,000,000 is considered a pretty healthy salary for mid-career office workers—and you start to understand why unmarried Koreans still live with Mom and Dad.

4. Sperwer on April 24, 2008 @ 6:42 pm

   And the answer to the outstanding question is, yes, these loans are fully recourse to the mortgagor, although the real bite in the ass is likely to some from the unsecured lender of the downpayment funds after the mortgagee gets made whole out of the foreclosure sale.  I’m saving up to go into the repo sale/purchase and flip business.

5. Brendon Carr on April 25, 2008 @ 9:55 am

   Sperwer, thanks for your save. There’s one other point to make—although a loan may be deemed “full recourse”, the truth of Korean law is that there are so many ways to hide assets that any portion of the balance not secured by property is non-recoverable in almost every instance.

6. Korea Beat on April 25, 2008 @ 12:37 pm

   I went to that Pascucci Coffee a couple years ago. Incredible it’s that expensive. They do make a lot of money from people going there just because it’s known to be used in many TV dramas.

   Frankly, these kinds of reports actually make me glad my wife would rather live in Chelsea than Seoul.

7. Tero on April 25, 2008 @ 4:39 pm

   Brendon writes:

   This doesn’t mean people don’t get greater leverage from somewhere else (merchant banks, insurance companies, etc.), but the “mortgage” loan only accounts for half the value of the property.

   I have a feeling that this leverage is quite widely used, particularly with those Koreans who “invest” in real estate.

   It is easy to find companies that advertise loans of up to 90% of appraised value. These loans are offered at completely usury rates.

   Case in point: A colleague of my wife “owns” 11 officetels. Considering his age and salary, I would guess the poor man has daisy chained a series of 90% financing to multiply his liabilities.

   It’s all fun and games as long as prices keep rising and there’s enough buyers, but I have a feeling that when the bubble bursts, there will be a lot of grief.

   Sperwer writes:

   I’m saving up to go into the repo sale/purchase and flip business.

   Good luck. I wish I had accumulated enough savings to buy more than a broom closet in Seoul.

8. Sperwer on April 25, 2008 @ 6:54 pm

   although a loan may be deemed “full recourse”, the truth of Korean law is that there are so many ways to hide assets that any portion of the balance not secured by property is non-recoverable in almost every instance.

   True enough, full recourse is cold comfort for an unsecured creditor.  But then, Korea is also like Texas and a few other places with which I’m familiar where defaulting on even a very small obligation is a significant criminal offense and, if the creditor has got the juice, can result in serious criminal complications for the defaulting obligor.  My secret weapon in my planned emulation of Snidely Whiplash is my KNP Daeryung brother-in-law.

9. Brendon Carr on April 28, 2008 @ 3:39 pm

   Um, Mr. Whiplash, default on obligations is no longer a criminal offense unless the complainant can trump up a fraud complaint. But that changed after you had already gotten out of the law game.

   Decriminalizing loan defaults, by the way, is one of the public policy fruits of the comprehensive bankruptcy law reform project on which my partner Doil Son and I worked in 1999 and 2000 (and 2001 and 2002) with some lawyers from Orrick Herrington and Richard Gitlin when we were at Shin & Kim. Criminalization of commercial obligations contributes to unwillingness to use the formal bankruptcy process, leaving a lot of defunct companies with keys left on the desk by walkaway owners.

   As for me, I too am thinking of growing a big black mustache before I get into the foreclosures game. I’m a traditionalist.

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