It’s a Housing Crash All Right
by Brendon Carr
But not the type that will restore affordability to the expensive Korean housing market.
As it turns out, former President Roh Moo Hyun taking economic advice from Karl Marx may not have helped the housing situation in Seoul after all:
Apartment Supply on Sharp Decline
Maeil Kyungjae (English edition) 11 Mar 2008Aftereffects of the apartment price cap are being witnessed. Supply of apartment houses is rapidly declining as constructors have virtually stopped selling new apartments under the judgment that it would be difficult to make ends meet under a price cap.
Opposing a large supply of new apartments dodging the price cap from last November to this March, the quantity of supply has halved in April from a year earlier and shrunk 61 percent from a month ago.
Doctor Apartment, a realty information provider, reported Tuesday that apartment houses which are to be sold in April nationwide totaled 20,268 in 54 regions, down 52.4 percent from the previous year’s 42,600 and 61.5 percent from the previous month’s 52,740. Seoul and the nearby regions (11,370) are likely to maintain the previous year’s level (12,669) while other cities and provinces which have already been loaded with unsold apartments will see a large dip in supply.
A recent survey of ten major constructors has also indicated a sharp decline in apartment supply this year.
Ten constructors including Daewoo Construction had supplied total 36,065 apartment houses in the Seoul region last year; however, the supply was forecasted to be reduced to 27,773 this year including 3,571 units in public housing sites; 11,722 in private housing sites; and 12,480 reconstructed apartments.
Really? But price controls are working so well in Zimbabwe.
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I think it is final time to end the Roh bashing.
There are many variables in this optimization problem, not only “Supply of apartment houses”. And they are not linked by simple linear relations. There is at least also:
* Apartment Unit Price: There is obvious speculation and bubble in Korea house market. We see in US (and in Japan before) what happens when nobody is addressing this in due time. Roh and others made their best to avoid bubble problems in Korea. They must be congratulated. However apartments are the main financial assets and saving for middle class families in Korea and lowering their prices destroyed his popularity among the middle class. The stock was starting to pick up as alternative, but it was too late.
* Population Concentration: related also to industry, education… Roh proposed moving the capital, which was painful for many people, but was the right thing to do. He was also making efforts to spread universities and their money more evenly around the country.
Living now in Germany and looking around, I compare. Korea must make a monument for Roh.
The future will soon confirm this. The incompetent new president and the bunch of lunatics around will make many people cry for the Roh times.
Well, that’s what you say. As for me, there will be a bit more Roh bashing, and if LMB turns out to be a disaster, there will be some bashing of him too.
With respect to your second point re: population concentration, that too is a matter of trying to force people to live elsewhere—to artificially create demand in another place, taking demand away from Seoul by forcing people who live here to live in another place. The problem is that there will always be people wanting to move away from their crappy provincial towns to the excitement of Seoul.
Brendon, you have lived too long in Seoul and you start to forget that there is world outside. The “crappy provincial towns” is where most of the population of US and Europe _prefers_ to live. They offer clean air, clean water, singing birds and cheap housing, high technology small and bigger companies. This is not the case in “Chaebolland”, I know, but it should be changed if Korea wants to survive.
Koreans are no different from the other people in this world when given equal conditions.
The bubble in Korea and the lack of developed market economy in Korea is distorting the picture. Until recently there was no other viable easy way to save money other than buy a house in Seoul. There was (and still) no other way to get decent education other than move to Seoul.
So the basic thing Roh-onomics tried to do is to break the demand, not to increase the supply, which you advocate. If this is confirmed in statistical data, this is a good thing. Sure, this is not the only measure, which needs to be taken. The population has to move out of Seoul area. Plain and simple.
Roh bashing has to stop. This is what I say.
Earlier today I was scanning the property listings in the Jamsil neighborhood. I noted that rental rates for 33 pyung apartments in the highest end complex in the area were down between 10 and 15 percent compared to just one year ago. I find it interesting that this is occurring in a neighborhood that the Korean government has targeted for growth, so one would expect prices to at least hold steady.
That’s very interesting, P. Hunter. Can you advise what those “rental” (by this I must presume you mean cheonse deposits rather than weolse monthly rents) rates are these days? Some of our Korea Law Blog readers are coming from outside Korea (more than half, actually), and over 80% are English speakers who might not have access to the kind of timely intelligence we can provide.
That Chamshil area is full of newly-constructed apartments. It’s one of the few areas where the demand is being met with additional supply.
A 33 pyung apartment (not officetel) in the most expensive complex in the Jamsil area is running about $100,000 key money deposit (returned after the lease is over) + $1,700~$1,800 per month. By the way, it’s not just the 33 pyung apartments that have reduced rental rates; it’s also true of the 48 pyung apartments in this complex.
I agree, Brendon, that there is considerable new supply in the area that could have some effect, but the target demographic for the new apartments is a notch below: The supply at the top of the market isn’t increasing in Jamsil. That’s why the drop in rental rates seems significant.
On further reflection, perhaps the large volume of new apartments in Jamsil is pulling down prices even at the high end. Some of it may even be anticipatory—20 to 40 more new high-rise apartments are due to come on the market in August.
Whatever the cause, the glut of upper middle class apartments in the Jamsil area means bargains for smart newcomers. If you work in the Gangnam area, Jamsil is a cost-effective place to commute from.
It’s also generally more friendly to Westerns than places like Hannam and Itaewon. I know of at least two Western families who chose Jamsil for this reason and say they have no regrets. Your own mileage may vary....
That says the annual return on the asset is pretty measly at something like US$26,000 per year. What’s the purchase price for that apartment? A million bucks? I bet it’s higher. But a million bucks for the 33 pyong place makes the rental yield 2.6%.
I’m from a crappy provincial town in the US. Such towns are decidedly much less crappy than the equivalent towns in Korea. Still, we have our share of “flyover country” detractors like the Koreans who insist that Seoul is the only place to be.