Shin Ji-eun: Let's begin Part 2 of the Apartment Economic Hotspot. I am here with Professor Park Hap-soo. Since we have already looked at the real estate market outlook for the second half of the year, we will now analyze the market in more detail. Recently, when I look at real estate news, the most frequently mentioned topic seems to be unsold units. On my way here, I saw news about unsold apartments in Jeju Island where electricity was cut off and the management office was closed, leaving tenants in a very difficult situation. It seems this is a serious problem not only in Jeju but nationwide. So, do you think the unsold units issue will be resolved in the second half of the year, or will it worsen? Please share your outlook.
Q: Outlook on Unsold Real Estate Units in the Second Half
Park Hap-soo: As of May, the nationwide number of unsold housing units was 68,600, which is 2,500 fewer than in April. Overall, unsold units are gradually decreasing. Although the total volume might seem burdensome, the real estate market in Korea varies by region, so we should not judge solely by total numbers. The metropolitan area is different from the provinces, and even within the metropolitan area, Seoul, Incheon, and Gyeonggi differ slightly... The same applies to the provinces. Although unsold units in the provinces are said to be serious, the truly problematic areas are about three places: Daegu with 12,700 units, Gyeongsangbuk-do with 8,600 units, and Chungcheongnam-do with 7,100 units.
So, it's not that the entire provinces are problematic, but these three specific areas are where the issues lie.
Other regions are not particularly concerning. This is because even within the provinces, the situation varies, and prices have not risen much, so they are not falling significantly either.
Overall, the decline in prices in the provinces is actually much less than the decline in the metropolitan area. Currently, January was the lowest point, and since then, the rate of decline has been slowing. In some provincial areas, the decline is almost negligible, and prices are even rising slightly.
Shin Ji-eun: You pointed out that since the provinces did not experience significant price increases, there is little room for major declines. You also identified Daegu, Pohang, and Chungcheongnam-do as the core regions with unsold unit problems. And you summarized that these areas will likely need to be monitored until around next year rather than expecting a quick resolution.
Q: How Serious is the Real Estate PF (Project Financing) Insolvency Issue?
Shin Ji-eun: We asked about unsold units, but along with that, the issue that is often mentioned these days like needle and thread is the real estate PF insolvency problem. There are many warnings that this could impact the economy and that construction companies might close one after another. Recently, there was also the Saemaeul Geumgo crisis, so many people are worried. Should we really be concerned at this level, or is it somewhat exaggerated? What is your view?
Park Hap-soo: It is a level that warrants some concern. To stabilize the real estate market, supply must be expanded, but the entities responsible for supply?the construction and development companies?are facing problems.
The causes are twofold: interest rates have risen, increasing overall interest expenses and worsening project feasibility; meanwhile, construction costs have also risen, further undermining profitability. In this downturn, developers need to sell at high prices, but with soaring costs and interest rates, they must reflect these in the sale price. This results in higher prices, making projects unprofitable from the developers' perspective. Consequently, sales are delayed, projects are stalled, and the volume of sales does not increase. This is one analysis.
The real estate PF issue will be a turning point in the second half of this year.
Interest rates need to stabilize as soon as possible, and inflationary pressures such as construction costs must also ease. If the second half passes well, we can expect improvements from next year onward.
Therefore, before PF issues escalate, there needs to be careful management of bridge loans and loan extension interest rates at various levels, including government involvement, to prevent defaults. The second half is a period with such risks.
Q: Evaluation of the Current Government's Real Estate Policy Direction
Shin Ji-eun: You mentioned the government's role. Whether it's unsold units or PF insolvency, these are not problems that can be solved by a single entity alone. The government's role seems very important, and I imagine the government is also deeply considering these issues. So, at this point, how do you evaluate the government's real estate policy direction?
Park Hap-soo: It has been over a year since the new government took office, and so far, the direction of real estate policy can be evaluated somewhat positively. There has been some success in stabilizing the overall market through deregulation. However, there is a persistent issue: loan regulations have not been eased. The main regulation, the DSR 40%, remains unchanged due to concerns about household debt increases, and instead, exceptions are made.
For example, special home mortgage loans like the Special Bogeumjari Loan allow loans up to 500 million KRW under 900 million KRW housing prices, which is somewhat of a loophole. The government operates exceptions without easing the DSR itself.
Also, in cases like reverse jeonse (deposit) where loans for returning deposits are exempted from DSR, government policies are being supplemented. Going forward, a key area for rational improvement is the DSR 40% limit. This was a hastily implemented policy during the housing price surge, but applying DSR 40% severely restricts loans for middle- and low-income earners.
For example, if someone earns 50 million KRW annually, 40% means they can only repay 20 million KRW per year. This means they can only get an auto loan of 20 million KRW. This favors high-income earners, so the DSR should be normalized to at least 60%. Previously, the loan regulation guideline was DTI 60%. DTI (Debt To Income) applies only to mortgage principal and interest, and credit loans only consider interest, but DSR applies to principal and interest of all loans. Especially for credit loans, the repayment period was shortened from 10 years to 5 years, and auto loans to 1 year, so even someone earning 100 million KRW annually can only borrow 100 million KRW. This inflexible system is maintained due to concerns about household debt increases.
This is more likely to harm the middle and lower classes and raises fairness issues. Two years ago, people could freely borrow under DTI to buy homes, but now under DSR 40%, they cannot even consider buying. Without using exceptions like policy fund loans or special Bogeumjari loans, buying a home is difficult. This is a problem. Therefore, raising DSR from 40% to 60% is necessary, which is still stricter than DTI 60%. For youth under 39, who have increasing future income, it should be raised to about 70%. Whether to take a loan or not is the individual's choice.
The system should operate to allow such choices. Household debt increase is not something to be excessively worried about because delinquency rates are low. Increasing the homeownership rate among the non-homeowners, currently about 56%, to around 65% would be a much better path to housing market stability. From this perspective, loan regulations need improvement. Also, the ultimate goal for market stability is supply expansion.
Supply expansion can be divided into two: first, expanding supply in urban areas through reconstruction and redevelopment. About 80% of supply in Seoul comes from reconstruction and redevelopment. Therefore, reconstruction regulations need easing. What are the main ones?
Safety inspections have been eased. Although not to the expected level, the structural safety ratio was lowered to 30% from 50% (previously 20%).
That is acceptable, but the biggest issue is the reconstruction surplus profit tax. This limits reconstruction projects and causes delays. This tax applies nationwide to all reconstruction projects. Although a revised bill has been submitted to the National Assembly and some discussions are ongoing, progress is slow.
The government announced the reconstruction surplus profit tax plan on September 29 last year, but almost a year has passed without passage, causing delays in reconstruction projects. The surplus profit tax on reconstruction should be boldly abolished. There is little justification for taxing surplus profits only on reconstruction.
There are three ways to buy a home: reconstruction, redevelopment, and new construction. Even if you buy redevelopment or new construction, there is no such tax. Only those owning old reconstruction apartments are unfairly burdened. They are real end-users with only one old apartment, but if they want to rebuild, they have to pay surplus profit tax. What would they think? They are not speculators. This tax should be abolished boldly to speed up projects and increase supply in urban areas. The housing problem in Seoul can only be solved in Seoul.
Many want to live in Seoul without moving out. To increase supply in Seoul, reconstruction regulation easing is necessary.
Next, the future supply in the metropolitan area is the 3rd New Towns. Although the supply can be expanded sufficiently on the same land area, it is not being expanded, which is unfortunate. This is the key policy to decisively lower housing prices: supply expansion. The 3rd New Towns are almost done with land compensation. For example, Goyang, Changneung, Bucheon, Daejang, Incheon, Gyeyang, Gwangmyeong, Siheung, Hanam, Gyosan, Namyangju, Wangsuk surround Seoul. These are closer to Seoul than the 1st New Towns and have very attractive locations. The planned supply is about 350,000 units, but it can be increased to over 500,000 units on the same land. I have proposed this to the government several times.
This can be easily done by slightly adjusting land use zones to residential land. Currently, the park and green space ratio is excessively high. About one-third of the new town area is parks and green space. While this might make the new town a premium area, given Korea's terrain surrounded by mountains and forests, there is no need to allocate one-third of the city to parks. The 1st New Towns have only one-fifth as parks.
Securing that much green space is sufficient. Reducing green space from 33% to 20% would free up over 10% of land, which should be converted to residential land. Also, the self-sufficient land for knowledge industry centers is about 15% on average, which should be reduced to about 5%. Currently, knowledge industry centers around Seoul have vacancy rates of 50-60%, which is serious. Yet, they plan to supply 15% more, which is unreasonable. Keeping only 5% is sufficient, and the remaining 10% should be converted to residential land.
By increasing floor area ratio on this land, about 150,000 to 200,000 units can be supplied in the same new town area. This is the fastest and easiest supply expansion method. This would lower housing prices.
Also, the 3rd New Towns have excellent accessibility, connecting to existing GTX lines. Therefore, the fastest and easiest way to stabilize the metropolitan housing market is to expand supply in the 3rd New Towns. The residential land ratio is only 26% of the total city area.
This is unreasonable.
We have secured 100% of the city area, but only one-quarter is for housing. This is neither reasonable nor common sense, not even one-third.
Shin Ji-eun: We need to carefully examine these points, and our listeners and subscribers should also be aware so they can make suggestions. You have pointed out important issues, so we will continue to study diligently. We have reviewed the problems in the real estate market and the government's policy direction. We will see you again in Part 3.
Professor Park Hap-soo
- CEO of Park Hap-soo Real Estate Research Institute
- Advisory Professor at Korea Institute of Finance
- Former Senior Real Estate Specialist at KB Kookmin Bank
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