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Oversupply, tighter lending threaten Korea's property market

South Korea's brisk property market has been a bright spot in an economy that has struggled for much of this year. Now, an oversupply of new homes and tougher lending rules may signal an end to the boom.

[SEOUL] South Korea's brisk property market has been a bright spot in an economy that has struggled for much of this year. Now, an oversupply of new homes and tougher lending rules may signal an end to the boom.

Real estate has been the biggest beneficiary of record-low interest rates, with construction investment growing more than five times as fast as the nation's economy in the April-June quarter. There were more housing transactions in the first eight months of 2015 than in any year since 2006. Further, pre-sales of new apartments have soared.

A downturn in the property market would be particularly damaging now, given recent data hinting at the prospect of Korea emerging from a slump after months of gloom.

"Regions where there's been a surge in new apartment sales in recent years may experience problems like a price correction," said Kim Kyu Jung, a real estate analyst at NH Investment & Securities Co. "Unless we see a significant economic recovery and a notable increase in income, property demand in 2016 will be weaker than this year." Prices and sales have risen, with the cost of an apartment in the Seoul metropolitan area climbing 5 per cent in September from a year earlier, the biggest monthly increase since 2008, according to prices compiled by KB Financial Group. The average purchase price for an apartment in the Seoul metropolitan area that month was 360 million won (US$313,000).

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There were 816,000 housing transactions in the year through August, a 30 per cent increase from the same period last year and the highest since 2006, according to the land ministry.

In October, there will be almost 95,000 pre-sales of new apartment units in Korea, according to Real Estate 114. This would be the largest number since the Seoul-based real estate information agency started compiling data in 2000. The number of housing pre-sales in the second half of this year "far exceeds" the inventory that is actually needed, based on the number of new households, and raises concerns of oversupply, according to a September report by Korean ratings company Nice Investors Service.

The number of apartments offered in pre-sale that remained unsold was 31,700 units in August, compared with 28,000 in April, according to the land ministry.

The main factor behind the boom was household debt, which rose to a record 1,130.5 trillion won at the end of June. On top of the 1 per cent reduction in the benchmark rate since last August, the government cut restrictions on buying property using credit in a bid to revive the property market and stimulate the economy.

The resulting debt surge led to concerns that repayment burdens are restricting consumption and that some households are taking out larger loans than they can afford, prompting the government to try and curb loan growth. Starting in 2016, banks should impose stricter standards in assessing repayment ability of home buyers and encourage fixed-rate, amortized mortgage loans, the financial regulator said in July.

"Government measures to control household debt from 2016 will make it difficult to buy a house relying on loans," said Sohn Jeong Rak, a Seoul-based researcher for Hana Institute of Finance.

Finance Minister Choi Kyung Hwan told lawmakers at a parliament audit this month that a bubble in property prices is unlikely in Korea as current transactions are not speculative purchases and are based on actual demand from buyers , often in their 30s and 40s.

The aging population is another factor driving longer-term pessimism about Korea's property market. Earlier this year, state-run Korea Development Institute warned that the nation could see a gradual downward trend in residential property prices starting in 2019.

"An aging population means a decline in people in their 20s to 40s" who will demand housing, said Sohn at Hana Institute of Finance.

He added: "It's only a matter of time before the aging issue starts affecting Korea's real estate market."