[Urgent Unsold Housing Diagnosis]④ Could Be More Severe Than During the Financial Crisis

[Asia Economy Reporter Cha Wanyong] As predictions that the number of unsold houses will surpass 100,000 units within the year gain traction, there are forecasts that if this materializes, the situation could unfold similarly to the prolonged stagnation following the financial crisis. Some even express concerns that, given the rapid surge in housing prices during the real estate boom from 2019 to 2021, the real estate market could face a worst-case scenario more severe than during the financial crisis.

Amid growing predictions that the number of unsold houses will surpass 100,000 units within the year, there are forecasts that if this materializes, the situation could unfold similarly to the prolonged stagnation following the financial crisis. The photo shows the view of city apartments from Namsan in Seoul.
[Image source=Yonhap News]

Housing and real estate research institutes unanimously predict a housing market downturn this year. The Korea Construction Industry Research Institute forecasts a 2.5% change in nationwide housing prices this year, while the Korea Institute of Construction Policy expects apartment prices in the metropolitan area to fall by 3-4%. The Housing Industry Research Institute also projects a nationwide apartment sale price decline of 8.5%, with metropolitan area apartments dropping by 13.0% this year.

The causes of the real estate market downturn are attributed to domestic and international macroeconomic factors such as high interest rates and economic recession. According to the Korea Research Institute for Human Settlements, over the past decade, the influence of the base interest rate on housing prices has accounted for 50-60%. However, even if interest rate hikes cease, the interest rate level remains high, and even if rates begin to decline, there are forecasts that buyer sentiment could worsen due to economic recession.

The sharp rise in unsold houses is particularly concerning because, based on past cases, it tends to coincide with periods of economic crisis. In fact, since the unsold housing statistics began in 1993, times when unsold houses reached around 100,000 units corresponded with problems in both the domestic and global economies.

The year 1993, when unsold housing statistics were first compiled, was marked by financial crises in emerging countries such as Mexico’s peso crisis. At that time, unsold houses increased from 77,488 units in 1993 to 105,586 units the following year, and surged to 152,313 units in 1995.

Afterward, from 1996, the number of unsold houses gradually decreased to 88,867 units in 1997, but with the outbreak of the foreign exchange crisis at the end of 1997, the figure rose again to 102,701 units in 1998.

In 2007, when the global financial crisis occurred due to the U.S. subprime mortgage crisis (Lehman Brothers collapse), South Korea’s housing market experienced its worst slump. Nationwide unsold houses, which were at 73,772 units in 2006, surged to 112,254 units in 2007 and soared to a record high of 165,599 units in 2008. The aftermath continued into 2009 with 123,297 units.

Compared to the financial crisis period, the current rapid increase in unsold houses is unusual. During the first year of the financial crisis, unsold houses did not even increase by 40,000 units, but since the housing market downturn began last year, the number has risen by more than 50,000 units?a difference of over 10,000 units.

Moreover, during the real estate boom from 2019 to 2021, speculative fever further accelerated the rapid rise in housing prices. According to the Korea Real Estate Board, the average sale price of houses in Seoul surged from 717.75 million KRW in 2018 to 827.23 million KRW in 2019, 893.10 million KRW in 2020, and 1.15147 billion KRW in 2021.

During this period, even remote investment flourished, and the nationwide unsold housing stock, which was 58,838 units as of December 2018, decreased to 47,797 units in 2019, 19,005 units in 2020, and 17,710 units in 2021. Notably, from December 2020 to December 2021, unsold housing remained in the 10,000-unit range for 13 consecutive months. This is the longest period of the lowest unsold housing volume since the statistics began. Previously, the 10,000-unit range was only recorded in April (17,169 units) and May (18,603 units) of 2002.

Many experts and the construction and real estate industries believe that significant price adjustments are unavoidable due to this real estate downturn. They diagnose that the downward trend in housing prices will continue until the end of this year or early next year, followed by a prolonged period of stagnation at the bottom, showing an ‘L-shaped’ trend. At the ‘2023 Housing Market Outlook and Policy Direction’ seminar, the Housing Industry Research Institute emphasized that due to the real estate market slump, construction company bankruptcies are rapidly increasing, and there is a high possibility of insolvency in the secondary financial sector, calling for measures to prevent the spread of the crisis.