[Viewpoint] Rethinking Real Estate Statistics <2> PIR

Professor Changmoo Lee, Department of Urban Engineering, Hanyang University

These days, articles frequently appear suggesting that housing prices have peaked and signs of price declines are emerging. On the other hand, the government's frequent citation of statistics from the Organisation for Economic Co-operation and Development (OECD) showing that South Korea's housing prices increased by 7.5% in nominal terms and 1.7% in real terms from 2015 to 2020 has drawn much criticism. The source of these statistics is likely the controversial nationally approved sample survey-based Housing Price Trend Survey. Internationally, price statistics based on actual transaction prices, not market price surveys, are the only option, so international comparisons should be made using transaction price-based statistics. The OECD average based on this is around 29%, and the entire United States reportedly saw a similar increase of 35% over the same five-year period.

In contrast, South Korea's actual transaction price index for the entire housing stock has unfortunately not yet been published. Judging by the actual transaction price index for apartment complexes, which account for the majority of housing stock (nationwide: 77%, Seoul: 88%), from July 2015 to July 2020, prices rose 17% nationwide and 32% in the metropolitan area. From the metropolitan area perspective, it is difficult to say that this significantly exceeds the OECD average level. The problem lies in the additional sharp rise of 25% over just over one year after that period and the cumulative 89% surge in Seoul.

The question of how much prices have risen does not always equate to how expensive they are. The price-to-income ratio (PIR), a representative housing affordability indicator that adjusts for differences in purchasing power across countries or cities, involves surprisingly complex choices. First, real urban area unit statistics are fundamental. In the case of Seoul, the comparison should be made not with the administrative district of Seoul City but with the Seoul metropolitan area centered on Seoul City as a single unit. This is because the metropolitan area’s central city has a high proportion of young and middle-aged single-person households and renter households with relatively low incomes. The PIR statistics we sometimes see for New York are mostly for the New York metropolitan area with a population of 20 million, which includes parts of Pennsylvania, rather than the 8.8 million residents of New York City itself.

Next, it is important how the representative housing price value used to calculate the PIR is selected. Overseas, since market price surveys are difficult, housing price statistics based on actual transaction prices covering all owner-occupied housing should be used. Applying representative housing prices based only on high-priced apartments can often lead to an overestimation of the PIR.

Due to limitations in published data, there is a possibility of overestimation, but if the PIR is calculated by applying transaction volume weights to the median actual transaction prices by apartment type, the metropolitan area’s PIR rose from 8.7 in 2010 to 9.4 in 2020. In 2020, the PIR was 5.9 for the New York metropolitan area, 8.9 for Los Angeles, 12.2 for Sydney, 8.5 for London, and 19.0 for Hong Kong. While the Seoul metropolitan area’s PIR is not low, it is difficult to judge it as extremely high. Despite the issues, if statistics are calculated only for the central city, which is the focus of interest, Seoul City’s PIR dropped from 13.4 in 2010 to 11.4 in 2015, then sharply rose to 17.7 in 2020. Compared to New York City’s 10.6 and the sharply rising Los Angeles City’s 12.3, this shows a considerably high level and indicates an inherent problem of concentrated price surges in Seoul City.

The reevaluation of the metropolitan area PIR level does not provide certainty that a housing price decline is inevitable due to high housing price levels. However, it does show that Seoul City, the central city, is at a considerably high level. Ultimately, the solution to this is linked to measures addressing the accumulated housing supply and demand problems in Seoul City.

Chang-Moo Lee, Department of Urban Engineering, Hanyang University