By Yoon Ja-young
Staff Reporter
Korea may undergo a Japan-style real estate deflation unless the country takes preemptive measures to fix the property market, a local economic think tank warned Tuesday.
In its report, KDB Research Institute said that apartment prices are higher than where they should be and figures are indicating that Korea could face the collapse of the bubble in its real estate market just like the United States and Japan. Economists are increasingly showing concern that Korea should be prepared for the bubble bursting.
The institute compared housing prices with inflation. It put both housing prices and consumer prices from 1987 at 100. While consumer prices compared with the 1987 figure was 277.9 as of 2009, apartment prices in Seoul marked 505.8, meaning the gap between apartment prices rise and inflation being 227.9.
It is much higher than the gap of 179.2 seen in the United States in 2006, right before the collapse of their housing bubble, or the 96.6 marked in Japan in 1990, the peak of the real estate bubble there.
While most developed economies saw housing prices fall following the global financial crisis, Korea saw an increase of 2.46 percent, which means there is still a bubble as there has been no price correction.
Korea's price to income ratio (PIR), which compares the housing price with household income, was higher than that of the United States and Japan. This means it takes more years for Koreans to buy homes with their income compared with their peers in America or Japan.
Apartments in Seoul were already more expensive than those in New York or San Francisco when considering the residents' income. PIR of apartments in Seoul marked 12.64 in 2008, much higher than 7.22 of New York or 9.09 of San Francisco. It means Koreans should save their salaries for 12.64 years if they want to buy a 109 square meter apartment in Seoul.
The institute added that if Korea's PIR is to fall to the level of the United States or Japan, a 290 million won house would fall to 170 million won.
"There is downward pressure in housing prices. A steep fall could be a shock as the real estate makes up a huge part of the household assets in Korea," said Park Yong-ha, a researcher at the institute. Real estate took up nearly 76.8 percent of assets for Koreans as of 2007, while it made up only 36 percent of U.S. household assets.
Economists agree that housing prices will fall in a couple of years. "Apartment prices in Seoul and its vicinity are likely to fall from 2013 or 2014," said Lim Sang-su, an economist at Hyundai Research Institute. He explained that the aging of the population and the low birth rate would pull down housing prices. Apartment prices have been sluggish during the past few months, and homeowners are having trouble selling their homes.
Economists warn that the government should prevent a steep plunge, as it would bring about a shock to the economy. "Falling real estate prices are likely to lead to long-term recession, by hurting consumer sentiment, decreasing investment, and adding to losses of construction companies and lenders," said Park Hyung-ryul, an analyst at SK Securities.
The burden of mortgages is increasingly putting pressure on household economies. According to KDB Research Institute, the housing affordability index in Seoul fell by 20 percent in the third quarter of 2009, compared with the first quarter of 2004. The index shows how much the household can pay back on a mortgage with their income, and a falling index shows that households are having trouble with repayments.
Korea's household debt ratio, or the ratio of household credit to total disposable income, soared to 66.8 percent as of 2008, from 44.4 percent in 2000. This is the highest figure among major economies following Switzerland and the United Kingdom.
"The government should adopt a monitoring system so that household debt does not lead to household bankruptcies," Hyundai Research Institute's Lim said. He also voiced concern over new satellite city projects or reconstruction projects in downtown areas, as they will increase apartment supply and accelerate the collapse of the bubble.
chizpizza@koreatimes.co.kr
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