Real Estate News: South Korea

South Korea’s housing market was feared to enter a long-term recession period as seen in Japan and the United States due to structural problems such as aging population, retiring baby boomers and low growth trend.

The Ministry of Strategy and Finance said in a report on Monday that slower growth of the country’s population and households weakened real demand for housing as places of residence, cautioning that retiring baby boomers were expected to sell large-sized homes, boosting oversupply in the local real estate market.

The ministry, however, noted that there was no big possibility for the country’s property market to slip into the long-term recession due to housing-related regulations such as the debt-to- income DTI and loan-to-value LTV ratios.

Despite the ministry’s denial, domestic housing prices were widely expected to fall further from the current level due to structural problems.

Demographic changes such as low birth rates and aging population along with the expected low growth trend will cause the prices to decline further over the long run.

A paradigm shift has been under way in the South Korean real estate market that had seen steady price gains since the Korean War. Local homeowners, who had viewed their homes as guaranteed investment vehicles, started to see those as places of residence.

The change in recognition was boosted after the Y 2008 global financial crisis, from when the local property prices slipped into the doldrums. According to Real Estate 114, the property information provider, average apartment prices in Seoul fell below the Y 2008-crisis level this year.

Bank of Korea BOK also warned over growing risks in the property market amid falling prices. According to the financial stability report, apartment prices in the metropolitan area fell 2.7 during the January-September period. The prices fell 6.9% on average compared with the previous high tallied in September 2008.

Weaker expectations for price hike lessened speculative demand for housing as investment assets, while the prolonged economic slowdown and its consequent reduction in household income as well as massive household debts prevented potential home buyers from purchasing homes through leveraging.

Population aging and retiring baby boomers reduced those aged 30-54, the major homeowner bracket by age, resulting in weaker real demand for homes as places of residence.

South Korean population has been aging at the fastest pace in the world. The country was predicted to become a super-aged society in Y 2026 after making an aged society in Y 2018, according to the United Nations. It already became an aging society in Y 2000. Societies whose proportion of the population 65 anni and over surpasses 7%, 14% and 20% are called aging, aged and super-aged society each.

The population aging entails the reduction in those 30-54 anni, the major demographic group that buys homes. The percentage of the 30-54 anni people was projected to peak this year at 43.5% before falling thereafter, resulting in weakening real demand for housing. The apartment market in Seoul and the broader metropolitan area has for the first time in history entered into a period of declining demand..

Japan experienced population aging negatively affecting its real estate market. Around 10 years after those aged 30-54 peaked at 45.1 million in 1986, land prices in Tokyo fell to a quarter of their peak levels in 1996.

Meanwhile, retiring baby boomers will trigger the home downsizing as those born between Ys 1955 and 1963 could sell the existing large-sized homes upon retirement to buy a couple of smaller ones, which can be rent to earn rental income.

According to the finance ministry report, there were 7.13-M baby boomers in South Korea as of Y 2010, taking up 14.6% of the total population. Retiring baby boomers will increase by 500,000 to 800,000 each year going forward, boosting oversupply in the large-size housing market. The price fall in the high-end, large-sized housing market may send shock waves throughout the overall property market.

South Korean economy is feared to fall into the long-term low growth trend due to persistent uncertainties at home and abroad. The low growth will lead household income growth to slow going forward, preventing the potential home buyers from purchasing homes through debt leveraging.

The Organization for Economic Cooperation and Development OECD slashed last week its Y 2013 growth outlook for South Korea to 3.1% from an earlier estimate of 4%. The Bank of Korea BOK cut its Y 2012 growth outlook to 2.4% in early October from 3% estimated in July.

Over the past 10 yrs, household income growth has never outpaced GDP growth. The country’s nominal GDP expanded at an annual average rate of 6.8% during the period of between Ys 2000 and 2011, surpassing the 5.8% increase for household income over the same period.

Some think tanks forecast that the country’s economic growth would stay in the 2% level in Y 2013 as well, darkening the outlook for household income growth next year.

In addition, household leveraging to buy homes was expected to be limited due to massive household debts and housing-related regulations such as the DTI and LTV ratios. The debt-to-disposable income ratio for urban working households surged to 163.7% in Y 2011 from 73.3% in Y 2000.

The ratio in the United States rose from 85.6% in Y 2000 to 139.8% in Y 2007 before the world’s # 1 economy was hit by the subprime mortgage crisis in Y 2008. Spain also saw the ratio jump to 130% before the sovereign debt crisis hit Europe.

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