Seoul Housing Bubble Deflating: Hope For Soft Landing
by Brendon Carr
It looks as if the bubble is popping, or at least deflating somewhat, in the Seoul housing market. I don’t know if that’s a good thing or a bad thing. Prices are definitely too high, but of course as a homeowner (thankfully, not a highly-leveraged homeowner) I’d rather the prices remained steady.
The Maeil Kyungjae reports that while I’ve been bleating about Korean apartment prices being too high, they’ve started falling. At least, in neighborhoods better than mine.
Here’s some select bits I’ve translated from Korean to English for the benefit of Korea Law Blog readers:
Where is the “Floor” for Expensive Apartment Prices in the “Bubble Seven”?
Medium- to Large-Size Kangnam Apartments Projected to Drop Another 10-20%Chart:
[Prices compared Nov. 2006 to June 2008]
Daechi-dong Mido 2-cha Apts (181.8 sq. m.): W3.05 billion -> W2.45 billion (-W600 million)
Daechi-dong Gaepo Woosung 1-cha Apts (214.8 sq. m.): W3.7 billion -> W3.15 billion (-W550 million)
Bundang Geumgok-dong Athena Rex (218 sq. m.): W1.55 billion -> W1.29 billion (-W260 million)
Mok-dong Shinshi Gaji #4 Complex (181.8 sq. m.): W2.05 billion -> W1.625 billion (-W420 million)
“It is difficult to foresee price increases unless there is some striking news like a change to the debt-to-income ratio regulations,” said UNR Consulting Representative Director Sang-Eon Park. “Shrinking demand means an additional 10-20% price decline seems possible for medium- to large-sized apartments.”
I have to believe that eight-buck-a-gallon gas (W2000 per liter)—and Koreans’ inexplicable preference for bloated black sedans that get 15 mpg—has something to do with these falling housing prices. The “Bubble Seven” story reports that satellite-city apartments in Bundang and Yongin are off 15-20% in June. My law partner Doil and I have had a project that has required us to drive out to the Kyeonggi Province city of Kwangju, and the roads have been oddly clear—Doil says it’s like being Will Smith in “I Am Legend” (except that we’re in an Equus—blech).
The Doctor Housing Bubble blog has already examined how gas prices and the stark increase of commuting cost has ravaged California’s exurbs. And that’s at just four bucks a gallon. It’s my belief that the Korean housing bust will be felt most acutely in Bundang, Yongin, Ilsan, Pangyo, and the other satellite cities of Kyeonggi Province, whose residents must commute to Seoul.
Anyway, back to Seoul… Strangely, though, while the prices of these “large” (which is, of course, a relative term—181.8 sq. m. probably yields only 1500 sq. ft. of usable living space, assuming a 75% ratio) apartments apparently drop by such large amounts, the cost of renting in Kangnam—and other areas perceived to have good “neighborhood facilities” (i.e., cram schools)—is going up:
In particular, in the Kangnam’s Daechi-dong and Dogok-dong, which are swimming in hagwon, there has been a rush of inquiries from apartment hunters in advance of the summer school holidays.
Chonsei lease price for a 112 sq. m. apartment in the Daechi-dong Mido 1-cha apartments has gone up by W10 million to the W305-375 million range, while an 85 sq. m. “A”-type apartment at Dogok-dong’s Dogok Rexle has gone up by W5 million to between W325 million and W340 million.
It’s much the same in Nowon-gu’s Chunggye-dong, which is said to be the “Daechi-dong” of the Kangbuk area.
The Konyeong 2-cha apartments, where the neighborhood is chockablock with hagwon, the popular 92 sq. m. apartment lease price has advanced by W22 million to reach the W155 million level.
Furthermore, the 105 sq. m. apartments, which share popularity with the 92 sq. m. size, are also transacting W15 million higher, at W170 million.
Summer “vacation”, what a cruel, cruel lie that is! In Korea, it’s just eight extra hours of cram school education.
I don’t send my children to hagwons (other than a taekwondo class, which is mainly just for health) because I think Korea’s cram school environment is cruel to children. Also, since I spend so much on tuition at the Yongsan International School of Seoul, I don’t actually have any money left over to send them to hagwon even if I wanted to do so.
Still, based on this weekend’s reports, I know what to do to help maintain or increase the price of my own (thankfully close-in) apartment: Open a hagwon—or, better yet, open two of them right next door to each other.
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I recently did some calculations for different areas in Seoul on the costs of buying vs. renting (using loans and opportunity costs in the analysis). In general, you would expect buying to be a slightly cheaper option, but as it turns out, it costs about twice as much to hold an apartment, as it does to just rent it.
Interestingly, the cost of the two rent systems, jeonse and wolse, were more or less equal, with wolse being at worst about 10% higher.
To make owning worthwhile (financially), you need about 3-5% annual appreciation at the current interest rates, depending on how bubbly the area is.
Of course, should prices go down, the cost gap between buying and renting will expand rapidly.
That, together with the out-of-the-way location of the exurbs, is going to wipe out those that were foolish enough to think you can print your own money by buying a house.
I don’t really think rents can go up much, though. Considering that the two loans should have about equivalent costs, who is going to start paying 2-3 million won per month in wolse?
Real Estate in Korea is quite an interesting subject. While family sized housing, especially in seoul, has reached fairly lofty asking prices, it’s still quite resonable to find a hole in the wall for next to nothing.
As someone who may jump into his first cheonse this year, I have a keen interest in the market here. I find it somewhat inconveniant that there aren’t that many resources available in English to help me along.
I appreciate the fact that you cover this issue here. I worry that with the economic situation getting worse, it will put upward pressure on the lower-cost housing market.
Also, while I’m rambling: Since the economy here seems to be on a downward trend, how safe are the chonse deposits? I’m aware that they may be insured with the dong-office and that there are checks as to the financial health of the owner, but it is still a cause of concern for me. Just how safe are these deposits? How likely is it to get any of it back in the case the owner goes bankrupt?
Any advice at all would be greatly appreciated.
(I just read the first comment)
Tero, how did you arrive at that 10% figure (re: Chonse and wolse)? Specifically, what investment platform (at what rate?) did you choose to get a return on the deposit money?
As a complete novice at this game, I’ve been asking around. Collective Korean wisdom says that Chonse is much better… and they frown upon the 450,000 I pay per month in rent.
For the same place, it would cost about 60 million to Chonse it, giving me a 9% return. Seems fair for what seems to be a fairly secure investment (is it?)
I have had “wolse” arrangements for three different places since coming to Korea. Without giving exact numbers, let’s just say I have some of the smallest deposits one can negotiate (with a corresponding higher monthly rent). In my situation, I have been advised that the risk is farily low. The logic is that in the case the owner disappears and the bank ends up putting the house on the auction block, there should be almost no issue getting my small key money back. Even with a huge discounted sale, it seems likely that there would be money remaining to may back my key money. In that case I would be betting that the original owner’s mortgage down payment was significantly higher than my key money payment (which absolutely must be the case). If there were to be a severe housing bubble burst, my logic could fail, of course. And that brings me to point #2. I have also been advised that techinically the tenant’s key money payment has lower priority over the bank’s investment, often in pratice the courts would order the tenant get paid first, especially given the small amount of my key money.
I would be curious to learn other’s opinion about this. My comments are just second and third hand information, and I could be way off base.
BTW, Brendon, you have the nicest “type in the word you see in the image” of any website I’ve visited. I like that is usually based on a real word, and not just plain jibberish. And it is legible - some websites distort the text so severely I can almost not read it myself.
Another great post. Thanks Brendon. Yours is my favorite Korea blog.
I’ve been eagerly awaiting the fall in housing. If the won really tanks, those who get paid in dollars might enjoy another 1998 style windfall. I’m gonna buy an Equus. Not.
Mixed feelings about the Yi Myong Bak won policy. Methinks Korea is really in between a rock and a hard place with a weak won being bad for oil import costs, and a strong one hurting exports. I wonder what the mob will dictate with their candles? My guess is they’ll pressure the gov’t back into a strong won position out of a desire to see Yi’s chaebol buddies come down a notch or two, and out of the pain ALL feel from high oil prices.
Your thoughts, Brendon?
Jonathan, thanks for the kind words.
With respect to your final question, I think the policy reversal back to strong-won has already happened.
Basically, I just calculated the annual opportunity cost of the different deposits plus monthly payments.
The rates I picked to be between the rate offered on a CMA account and bank loans, as I felt that those two would be pretty standard lower and upper financing boundaries for normal folks like myself.
For instance, a specific apartment in Bundang would require a 210 million won jeonse (sorry for my romanization, btw), giving about 0.9 to 1.6 million won monthly (opportunity) cost at interest rates ranging from 5% to 9%.
The same apartment building also offers wolse at 55 million deposit and 800,000 won monthly rent. Combining the two gives you about 1 to 1.3 million won a month in costs at 5-9% rates.
As the interest rates (or inflation) goes up, wolse actually becomes a much more attractive option. Also, your deposit is smaller, so the risk of losing it is less unnerving.
Often jeonse is much cheaper, true, but it is possible to find comparable wolse in almost any area in Seoul.
I seem to recall that chonsei usually goes up when house prices are flat/falling. The reason for this that I was given is that less people want to buy as they stand to lose money if house prices go down further. So instead they rent for awhile until the market rebounds and this means that demand for rental housing rises.
Although you mention that prices south of the river are reported to be going down, I’ve heard from quite a few people that bought property north of the river in the corridor up towards Uijong-bu that prices have gone up sharply over the past year (60-70%) - although they are still cheaper than south of the river.
I’m in Mapo and prices posted in the real estate agents have moved up a fair amount over the past two years and I haven’t seen any signs of any fall yet.
Rob—It’s correct that heavy redevelopment in the Kangbuk area (north of the river) has put a quantity of better-quality apartment housing onto the market. Those apartments, and the “facilities” that accompany them (hagwons) are attractive to families who would otherwise consider they have to live in Kangnam.
But 60% increase in a short period is worrisome. My apartment in the Dongnimmun area is one of those Kangbuk apartments which have increased quite rapidly in the last few years.
Brendon - I suspect that the fall in Kangnam and increase in the north might also be linked in that “Kangnam ajummas” have been moving their investments north owing to Seoul’s plans for redevelopment of city areas north of the river - and perhaps a feeling that prices in Kangnam couldn’t go any higher so it was time to chase profits somewhere else. Congratulations on getting in ahead of the herd.
It’s not uncommon for small hagwons in Japan to be in converted apartments. So you’ll walk down a completely staid apartment hallway and then bam! colorful English signs everywhere.