A 20-Year Real Estate Expert Talks About the 'Reasonable House Price' [Apateu]

Shin Ji-eun: This is the economic hotspot! We have real estate expert, appraiser Park Eun-jung with us.

Q Is this a genuine rebound or a fake rebound?

Shin Ji-eun: Regarding the real estate market outlook, there are very divided opinions: some say it is a rebound now, others say it is not; some say house prices will rise, others say they won’t. What do you think about the market situation, appraiser?

Park Eun-jung: First of all, real estate is a very heavy asset by nature. Most of our assets are concentrated in real estate, and for most people, real estate usually means housing, so they pour most of their assets into it. Also, since it is often purchased by leveraging future income through loans, it is a heavy asset that is chosen once and held for a long time.

Also, because of tax issues, unlike stocks where you can quickly sell when prices rise or cut losses when prices fall, real estate is not that kind of asset. So, it is a product that requires a longer time horizon.

Until just a few months ago, there were many stories about prices dropping by hundreds of millions of won. Now, the talk is about prices rising, but I think there is no need to be overly shaken.

For about five years, prices rose abnormally for a long period. Before that, for almost 10 years, prices were stable. The recent five years saw a large increase, but since early this year, prices have been adjusting. Recently, transactions have picked up again, and there is talk of prices rising.

Looking at the nature of transactions, since real estate is very individual, a property can be sold at a higher price or at a price several hundred million won lower, and transactions can freely occur. Whether the transaction volume supporting those prices is maintained will determine if this is a genuine rebound or a real decline.

Currently, for about three months this year, Seoul apartment transaction volume has been around 3,000 cases. Previously, it was less than 1,000 cases. Although it has risen to about 3,000 compared to before, this volume is still low compared to average levels.

The reason prices started adjusting since the end of last year was that transactions sharply decreased, asking prices dropped, and although transaction volume was low, prices fell with each deal. However, after the 1.3 policy was announced this year, which relaxed loan regulations and lifted real estate restrictions, the government basically said, “Please buy,” by providing loans under conditions similar to before. As a result, transaction volume increased. But this increase is due to artificial stimulus and is still significantly below average transaction volume. So, whether this can be called a real rebound is very doubtful. During the peak of the “all-in” (Yeongkkeul) frenzy in 2020 and 2021, the highest monthly transaction volume was 15,000 to 16,000 cases. In 2013 and 2014, when prices were stable, typical monthly transaction volume was about 5,000 to 7,000 cases.

Shin Ji-eun: So it has decreased significantly compared to those times?

Park Eun-jung: Yes. The current transaction volume is slightly higher than when transactions were said to have disappeared, but just based on this, it is doubtful whether there is enough momentum for a sustained rebound.

Shin Ji-eun: So, looking at transaction volume trends over the past 10 years, the market is still not recovering to previous levels, so the market situation is not very good. From that perspective, do you think there is still room for house prices to fall, at least for Seoul apartments?

Park Eun-jung: People tend to think that if their house price rises by 50 million won or 100 million won overnight, their asset has increased by that amount. But in reality, they base their asset value on the highest price without actual transactions backing it up. So, the actual value may vary for each person. I think there is still a long way to go compared to the peak.

Shin Ji-eun: Is there any way besides transaction volume to tell if this is a real or fake rebound?

Park Eun-jung: Ultimately, thinking about who will consume the house, who will buy it after me, the answer is very clear. The standard type of house that ordinary people live in and prefer is an apartment. Depending on the apartment and its location, people with matching income levels will live there. Apartments are the product demanded by people living and basing their lives in Korea.

For someone to buy at a much higher price than I paid, after some time, a similar person must have significantly increased income or be able to borrow more based on their credit to pay a much higher price. Considering the average income of 50 to 60 million won and the average Seoul apartment price of 1.2 billion won, we can see how much bubble is in the market.

Also, many people who entered during the recent Yeongkkeul frenzy bought at prices 2 to 3 times higher than before. But looking at the total apartment supply, Yeongkkeul buyers (excluding new supply) account for only about 10% by normal turnover standards. The remaining 90% bought at much lower prices in the past and are managing their loans. The expectations of recent Yeongkkeul buyers are high, but the 90% who already owned homes do not share those expectations. When prices adjust, those owners have more room to bear losses and can list properties at lower prices than Yeongkkeul buyers.

Q Is there such a thing as a reasonable, appropriate house price?

Shin Ji-eun: In the real estate market, prices are determined by supply and demand, but is there such a thing as a reasonable or appropriate house price? What would be the benchmark or indicator?

Park Eun-jung: People have different views on real estate, so it cannot be decided by one factor. But usually, there is an index called PIR (Price-to-Income Ratio), which compares average house price to income. It shows how many years of total income it takes to buy a house and is used as a reference for appropriate price levels. In the past, for Seoul apartments, it took about 7 to 8 years of total income to buy a home. Since people cannot save all their income, doubling that means about 15 to 16 years of savings to fully own a home. At the peak of the recent Yeongkkeul frenzy, it was about 19 years, meaning 19 times annual income, or nearly 40 years of total income to afford a home. Prices have risen dramatically in just a few years. However, no one buys a home with only their own money; most use loans. Loans are given based on the borrower's ability to repay and the collateral value of the property. The amount of loans has increased significantly.

Shin Ji-eun: So the amount of loans was set higher than what people could realistically handle?

Park Eun-jung: They didn’t consider what people could handle at all. They just said, “Since the house price is this much, we will lend this much relative to the price.” But the borrowed money can only be repaid by disposing of assets. Now, the system checks income and limits loans to what borrowers can realistically repay. This trend will continue, and for financial soundness, lenders are stricter. So, if people who bought with excessive debt cannot get more loans, prices cannot rise further.

Q The most important thing to consider when buying a house

Shin Ji-eun: As an appraiser, you have long experience evaluating real estate and measuring indicators. From a buyer’s perspective, what should be the most important consideration?

Park Eun-jung: Rather than thinking about making a lot of money by buying a house, I think you should focus on the fundamental value. You should consider the subjective utility you can enjoy from the house and whether you can afford to pay that amount, and buy a house that fits your level. Nowadays, some people endure 2 to 3 hours of commute if they think the area will appreciate, but you should consider whether you have a firm belief that selling the house will bring you that asset gain, whether it is worth taking risks in the current tough market, and whether you want to mortgage your life for decades.

Shin Ji-eun: Since a house is where you live and build your life, it is both an investment asset and a daily utility. People should carefully review this while looking at the market. We have looked at the real estate market outlook for the second half of the year with the appraiser, and we will continue in part 2.

Appraiser Park Eun-jung

- Graduated from Yonsei University, Department of Urban Engineering; Master’s in Real Estate from Konkuk University
- Worked at Korea Appraisal Board from 2003 to 2017
- Certifications: Appraiser, MAI (Member of Appraisal Institute, USA), Licensed Real Estate Agent, Specialist in Maintenance Project Management