Yikes! Unsold/Unsaleable Housing Problem Spreading to Seoul
by Brendon Carr
My August post on Korea’s dire housing-affordability problem has proven to be one of the most popular on Korea Law Blog, ranking second behind Attention Drug Fools where I warn English teachers and others against thinking their smuggling scam is not already known to the authorities (and ahead of How to Get a Job at a Korean Law Firm—this despite the well-known job-grubbing nature of law students).
Now the Dong-A Ilbo reports that unsold apartments aren’t just a problem in the provinces, but also here in Seoul—even the hot, luxury Kangnam area where everyone wants to live:
[O]nly two people bought apartments out of 50 units of Lotte Castle Medici put up for sale in Seocho-dong, Seocho-gu, leaving 48 units of apartments unsold… [The buyers of the two units later backed out of their purchase contracts.]
The sale price of the apartments was around 26.5 million won per 3.3 [sq. m.] (1 pyeong), and the builder offered zero interest rate financing, and a balcony expansion for free, which led Lotte Construction to believe that many apartments would be sold, even though the apartments were pricey.
One official of a construction company said, “Usually, 30% of apartment units are sold even though their location is not great as long as they are in the Gangnam area. What happened to the Lotte apartments is shocking.”
In fact, many in the construction industry said that this is the first time zero sales have taken place since the financial crisis. Outside of Seoul, where things are even worse, other apartment complexes have been built with a zero occupancy rate.
KCC Switzen (367 units), which was put on the market recently, has a zero occupancy rate, while Shincheon Cheongaram (43 units) has had only one buyer.
Those unsold Lotte apartments, by the way, at 26.5 million won per pyong, work out to 1.14 billion won (almost US$1.25 million!) for a spacious 1175 square-foot apartment similar to the grand palace in which I live.
As the Dong-A Ilbo notes later in the story, Korea’s screwy government-dictated housing policies have produced the frozen, distorted market where apartments can’t be sold while there is a profound shortage of housing. They’re going to kill the construction companies first, and may lead the country into a Japanese-style “Lost Decade”. Note the strength of the won and recall the advent of the word endaka into the financial vernacular.
So, the bubble is popped. What now? If you’re an investor wanting to pick up a Korean construction company, watch this space. There will be more bankruptcies coming, and some of them will be the so-called “major” construction companies like Lotte. If you’re a shareholder in a Korean construction company, now (okay, yesterday) is the time to get out of your position. As for me and my partner Doil, well, we’re brushing up on bankruptcy. Years ago, we were associates laboring for two years on an IMF/World Bank structural reform consultancy project on bankruptcy law, which resulted in an overhaul and consolidation of the bankruptcy code. That practice area looks to be coming back into vogue.
And if you’ve got cash and dreams of getting into Kangnam, sit tight. You may be on the cusp of a buying opportunity. See this TV report about what’s happening with unsold tower-apartment units in Miami. One possible difference between Miami and Seoul, though: In Miami there is a true oversupply of units. Here in Korea, the market is frozen because of the dizzying height to which prices have risen, coupled with stupid government intervention.
See also my earlier, related posts on this topic: Housing Policy and the Korean Dream, Is There Really a “Glut” of Housing in Korea?, and Watch the Construction Companies: Korea’s Canary in the Mine.
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It is worth noting that the Lotte Castle apartments were recently spotlighted on a Korean news show. Angry citizens were bilked by the construction firm. The materials used in the actual apts were much cheaper than in the show places. The work overall was remarkably shoddy and there were video clips of angry confrontations by new owners and the construction company people in this story. It may not be a good example to use in this argument.
It seems that housing prices may be starting to fall, if my quick skim of this article is correct.
http://news.chosun.com/site/data/html_dir/2007/10/21/2007102100069.html
By the way I’m now browsing with images turned off… nice caption where you have your picture.
Korea Beat, thanks for the story. Yes, that one is pretty interesting: The price of a 333 sq. m. unit (about 3600 square feet—luxurious) in the Tower Palace Apartments, one of Seoul’s most prestigious buildings, has recently dropped by about 10% to W4.9 billion.
Happy to find this webblog but rather surprised to see you, a lawyer by training, resorting to dismissing Korean laws as stupid and screwy. It isn’t only in this entry but also in your discussion of Korean car insurance law. I wonder if you have ever read about no fault insurance in the USA? It isn’t all that different. Both drivers are presumed to be at fault in accidents there, too. The purpose, as I understand it, is to minimize litigation and get compensation payments out quickly. Doesn’t seem so stupid. As for the real estate laws being stupid, let’s compare them to what has happened in the USA, eh? Now there is a rational set of laws leading to a huge meltdown. I suppose that is better than a few empty apartment complexes and a few distressed construction companies in the short run. Anyway, my point is just that using language like “stupid” and “screwy” is not what one expects from the legal mind.
Sorry to have disappointed you, Chris. You’re entitled to a full refund on what you’ve paid for Korea Law Blog.
But in this entry, no laws are described as “stupid”. What’s stupid is the Roh government’s intervention in the housing market—the effects of that stupid intervention will be felt in the coming years, because housing starts have essentially evaporated. If you think the response to increasing price of a shortage good (apartments in Seoul) is reduction of supply, then sorry mate—you deserve to be called stupid.
As for no-fault insurance in the United States, there is a salient difference you overlook: In Korea these are not civil disputes, but criminal cases. Assigning criminal liability, with the threat of jail, in matters where there is no fault, strikes me as screwy. If you check out the story at Korea Beat that inspired me to write about traffic law, you’d see a lot of Koreans agree with me.
Toughen up, Chris. If stupid or screwy is the best way to describe something, then that’s the word I’ll choose. That’s just how I roll.
Interesting response. My mistake. I didn’t realize that people were being put in jail in Korea for being involved in accidents where they had no fault. Is it so? Wow. Hopefully you and your law firm are fighting to end that injustice.
From your response to my last comment I get the idea that you don’t really like criticism of your style on what is after all your own blog. Sorry about that. Roll on. Cheers.