Yoon Jae Kwang sidestepped the global financial crisis by selling all of his mutual funds after 100 percent returns to buy an apartment outside Seoul in 2007. Three years later, the housing market has slumped and Yoon faces a loss on his investment.
The 112-square-meter (1,200-square-foot) home, which jumped as much as 16 percent from the purchase price of 320 million won ($280,000) in just a year, has dropped 22 percent in value from the peak. Yoon can’t find buyers for the apartment in Yongin, 49 kilometers (30 miles) south of the capital, to pay off the 80 million won he borrowed to help pay for it.
“I am stuck; you know the price will drop more for at least another couple of years, and yet you can’t do anything about it,” said Yoon, 34, who works at a software development company in southern Seoul. “What happens when the time comes for me to pay off my debt?”
Yoon’s difficulties reflect his government’s success in cooling the market, while property prices soar in Hong Kong, China and Singapore. In Korea, government efforts to forestall a property bubble and rein in record household debt have damped prices and sent consumer sentiment to a 14-month low in September.
Apartment prices in the Seoul metropolitan area have fallen 2.7 percent so far this year, the first decline in six years, according to data from Kookmin Bank, South Korea’s biggest lender. The number of unsold new apartments in Seoul has increased 16 percent, while existing apartment sales slumped 59 percent below their average of the past four years, according to the Ministry of Land, Transport and Maritime Affairs.
Hong Kong, Singapore
Home prices are up about 15 percent in Hong Kong in 2010 and jumped 38 percent in the 12 months to the end of June in Singapore. China’s property prices rose 9.3 percent in August from a year earlier, even as officials crack down on speculators and multiple home purchases.
In South Korea, the declines come even as the economy bounces back from the global financial crisis with forecast growth of 5.9 percent this year. The Bank of Korea raised its forecast in July from 5.2 percent predicted in April.
The central bank will closely monitor inflation, Governor Kim Choong Soo told reporters today after keeping the benchmark rate at 2.25 percent, which he said some board members opposed.
“People are saying the stock market is booming and companies are enjoying record earnings,” said Jeong Ai Nam, a local realtor in southern Seoul. “The housing market, it’s a totally different story. Demand has dried up.”
Apartment prices in Seoul had increased 3.2 percent between January and September last year, according to Kookmin Bank, as a $52 billion stimulus package and record-low interest rates spurred demand. Bank lending to households expanded in June last year by the most in more than two years on demand for mortgages.
To stem the surging household borrowing, the Financial Supervisory Service in July 2009 said buyers of homes worth more than 600 million won could borrow only as much as 50 percent of the property’s value, down from 60 percent previously. Then in September, the government tightened debt-to-income rules, allowing banks to extend no more than 50 percent of a borrower’s annual income to purchase homes in Seoul and 60 percent in Incheon and Geyonggi provinces near the capital.
Apartment prices and sales then started their slump, prompting the government of President Lee Myung Bak to ease some of its curbs this year. On Aug. 29, Lee’s administration announced a seven-month exemption to the 50 percent debt-to- income rule in Seoul, while leaving it in force in three southern parts of the capital -- Gangnam, Seocho and Songpa -- that it deemed “speculative zones.”
The 60 percent limit imposed outside the capital has also been suspended until the end of March, and a nationwide waiver on taxes for home sales was extended until the end of 2012.
The changes have yet to spur property transactions because buyers are concerned prices may fall further, said Cho Min Yi, head of research at SpeedBank, a housing consulting company in Seoul.
“It’s all about sentiment,” said Cho. “You can’t expect the property market to recover soon while people stand pat.”
The government may not be able to take further action to boost the market as it remains concerned about overheating prices and household debt levels, Cho said.
South Korea’s household debt jumped 20 percent to a record of 754.9 trillion won at the end of June, from the end of 2007, according to the Bank of Korea. Home loans increased to 349 trillion won, up from 293 trillion won in 2007.
This makes South Korean consumers’ debt as a percentage of their income higher than that of the U.S. and Japan, according to Moody’s Investors Service.
“The high indebtedness and vulnerability of households to a rise in interest rates are further increasing the downward pressure on housing prices,” Moody’s said Sept. 7.
Banker Lee Gi Do bought an apartment in southeastern Seoul for 450 million won last year and within a week his agent offered him 7 percent more to sell the property. A year later, the apartment’s value has dropped almost 10 percent below the purchase price and Lee can’t find a buyer.
“My dream’s become a nightmare,” said the 33-year-old. “Far from making money, I may struggle to pay my monthly interest bill if the central bank raises rates more.”
The stagnant property market also has forced South Korean builders to restructure debts after the construction industry shrank 0.9 percent over the three months through June, the third drop in four quarters, according to the Bank of Korea. The decline contrasts with 1.4 percent growth in South Korea’s gross domestic product in the period.
Combined second-quarter profit at local lenders including Kookmin Bank dropped 34 percent from a year earlier after they set aside extra loan-loss reserves to help construction and shipbuilding companies restructure debts, the Financial Supervisory Service said on Aug. 3.
Moody’s expects a surge in credit losses from the construction industry, which will weigh on Korean bank earnings, the credit rating company said.
The household loan delinquency ratio for South Korean banks rose to 0.78 percent in August from 0.48 percent at the end of last year and soured mortgage loans almost doubled to 0.64 percent from 0.33 percent.
The average cost of leasing an apartment is on the rise in the Seoul metropolitan area as potential buyers are favoring renting for now amid concerns of further declines in home prices. Rents in the nation have jumped 4.4 percent so far this year, the biggest gain for the first three quarters since 2002, according to Kookmin Bank.
“It’s a typical bottleneck as people are delaying buying a home and rushing into the leasing market,” said SpeedBank’s Cho.
Still, software developer Yoon says he will hold onto his Yongin apartment for now.
“You always hear about how real estate is where the big players invest their money in Korea; that you never go wrong with property,” Yoon said. “That may have been true for my parents’ generation, but not mine.”
-- With assistance from Saeromi Shin in Seoul. Editors: Brett Miller, Andreea Papuc