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Ruraljuror
Joined: 08 Dec 2007
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 Posted: Tue Nov 11, 2008 6:25 am Post subject: Scary Real Estate Inflation |
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I'm writing this as a public service: Trust me, you do NOT want to move in the current housing market. If you, like me, have a lease ending soon, talk to your landlord and LOCK IN YOUR CURRENT PRICE for another year. Just trust me. The Seoul market has gone insane, especially considering how crappy the economy is currently.
Long story short (and believe me...this is a LONG story I'm abridging for you) we've had a year of warring with our landlord...a complete and total *beep* ajosshi drunk on the unbelievably massive power of owning a tiny villa in Yongsan-Gu. He was making threats about holding our key money until after he finds someone else to take over the lease, so my wife had her brother-in-law who is a property lawyer prepare a legal document and send it to him documenting the date we are leaving and the money he was legally required to give us (surprisingly, the date we are leaving is the exact date that our lease runs out...this was a major point of contention...us, you know, wishing to comply with the written contract). We haven't had any run-ins with him since...which is nice...but the housing market has blown up in the last year. I'd give just about anything to take back the legal document and put up with his abuse for the next year if we were able to stay at the current rate.
We currently live in Central Seoul, about 20 minutes from my work. Our plan was to move out of Seoul, to an outlying area to get a bigger, nicer, newer place. This would require a 1+ hour commute to and from work every day, but that's not a problem for me if it means having a nicer place to live. Well my wife went house shopping today and was devastated by what she found.
By moving an hour away from Central Seoul, there are exactly ZERO places available for what we are paying now. It just doesn't exist. There is absolutely no property crappy enough that it can be purchased for the same amount of money that we pay for a 3 bedroom villa in Yongsan-Gu. If we leverage ourselves a bit and give twice the key money and pay 200000-300000 won more money than we currently pay in rent a month, then we can get a place...but the place will be SMALLER than the current place that we have. And I'll be riding the subway an hour to and from work every day next year to commute to this smaller house (I love my job and will NOT give it up).
So we got worked over pretty good by the unbelievably insane Seoul housing market. Don't let this happen to you. Trust me, no matter how you'd like to get a new place for next year, you'd be crazy to give up the rate you are currently paying for the place you live at. Prices are that inflated.
The scary thing is, I have a pretty great job in my opinion (I make more than 3 million a month) and the prices for even the crappiest of crap holes well outside of Seoul are out of my price range for rental. How in the world can the average Korean keep up with this inflation? Alot of my wife's friends live on half what I make...and raise a family too! How high is inflation going to raise this bubble?
Now the rest of this post is speculation, but after hearing what my wife noticed today I think it needs to be said. I'm using the Korean Law Blog for alot of my facts here, as I don't know of anywhere else that has such consistently interesting analysis of Seoul real estate in English.
1st point: Seoul's housing bubble is the worst in the world. Worse than California before Summer '07 ever was. A way to judge how severe a housing bubble is, is by looking at it's median multiple: How much more is the average house than the median salary. London is considered to have a nasty housing bubble, as the average property is 7 times more than the median salary. Well, in Seoul, the median multiple is 19.8. And I'd wager than the median multiple is much worse now than it was when this article was written, based on the inflation my wife found today.
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| For Seoul to have a median multiple of just the 7 which is considered insane in London (instead of the 19.8 reported last year), the average household income will have to reach W100 million. |
http://www.korealawblog.com/entry/koreas_own_sub_prime_housing_crash_in_sight/
2nd point: Because the prices to buy a house are so outrageous, more and more people are turning to rental, thereby increasing demand and rent for us expats (the vast majority of whom rent).
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In particular, in the Kangnam�s Daechi-dong and Dogok-dong, which are swimming in hagwon, there has been a rush of inquiries from apartment hunters in advance of the summer school holidays.
Chonsei lease price for a 112 sq. m. apartment in the Daechi-dong Mido 1-cha apartments has gone up by W10 million to the W305-375 million range, while an 85 sq. m. �A�-type apartment at Dogok-dong�s Dogok Rexle has gone up by W5 million to between W325 million and W340 million.
It�s much the same in Nowon-gu�s Chunggye-dong, which is said to be the �Daechi-dong� of the Kangbuk area.
The Konyeong 2-cha apartments, where the neighborhood is chockablock with hagwon, the popular 92 sq. m. apartment lease price has advanced by W22 million to reach the W155 million level.
Furthermore, the 105 sq. m. apartments, which share popularity with the 92 sq. m. size, are also transacting W15 million higher, at W170 million.
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http://www.korealawblog.com/entry/seoul_housing_bubble_deflating_hope_for_soft_landing/
3rd Point: Here's where it gets scary. The thing that really has really crippled the US housing market are ARM's (adjustable rate mortgages). These are the mortgages where you pay very little for the first 2 years, at which point the loan recasts to a much higher rate. The only way this mortgage makes sense is if you expect the property to increase in value and plan to move in 2 years, in which case you can keep bouncing from place to place making a nice profit everytime you move. The problem is, this is basically a pyramid scheme contingent on always finding people to pay you more than you paid for the property. If housing prices were to decrease, you'd be stuck paying 500 million for a property currently worth 400 million...and paying at a nasty rate too, as your ARM is screwing you due to your 2 years of minimum payments. This is what is currently happing on a large scale in California. Well, here's the scary thing about the Seoul real estate market:
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Over the weekend a story appeared on the Korea Times website about the risks associated with Korea�s housing prices and home loans, a topic near and dear to my heart. It seems Korea�s housing finance system puts borrowers at risk in a manner similar to the sub-prime meltdown and coming adjustable-rate mortgage tsunami in the States.
You see, virtually all (90%, according to the Korea Times story) of Korea�s home loans are adjustable-rate mortgages, the kind which are now roiling the US housing market as they reset. Foreign bankers at HSBC, KEB, and Citibank have tried to interest Korean borrowers in fixed-rate loan products, but the market has heretofore been wholly uninterested in such loans. Korean borrowers prefer, and therefore the banks provide, adjustable-rate mortgages.
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But Koreans do Southern California one better. Korean housing loans, in general, are also not �fully-amortizing� loans�instead, borrowers take out an interest-only loan with a term of one to three years, during which time they pay only the interest and none of the principal (although, like my family, they might save separately and pay down the principal that way). At the expiration of the term they roll the note over. Why don�t they pay any of the principal during the term of the loan? Well, for starters, just like the fools in the US housing bubble, nearly all Koreans are convinced that �Real estate only goes up. They�re not making any more land, you know.� But also, the principal balances�even on 50% LTV loans�usually exceed six or seven times the borrowers� annual income. As a result, the interest expense is too great to add principal repayment to the burden.
Besides, because property always goes up, and lately has gone up like wildfire, only a sucker would pay principal now. You can take care of that when you sell the property, from all the capital appreciation that�s guaranteed to occur! After all, real estate only goes up. They�re not making anymore land, you know.
Now we add the risk factor of the variable-rate loans. Because of the wild property bubble inflation of the last few years, a lot of Koreans have stretched themselves by buying into properties on which they can barely afford the interest-only payments. Interest rates have been quite low of late, with housing loans in the high 5% range available (again, not to you, Mr. Good-Job Foreigner, but any Korean on the street could get one).
But what happens when the interest rate increases, say, to the high 7% range? That interest-only payment, which the homeowner could barely afford in the first place, is now almost 40% greater than it was before. A W1,000,000 payment (which would comprise half the after-tax monthly income of the average Korean wage earner) is now almost W1,400,000. It becomes that much harder to pay the interest. (Remember, most borrowers don�t touch the principal.) Also, since local banks are now required to examine the borrower�s ability to continue to service the loan, by comparing the payment burden to the disposable income of the borrower, many Korean homeowners may find it hard to roll those notes over.
And that means lots of foreclosure sales, or short sales, coming soon. But those tend to depress prices. So mark my words, Korea�s property is entering a deflationary phase. In Japan, Hong Kong, and Singapore, at least, past experience with property bubbles has shown us losses of up to 70% are possible.
Here�s where the 50% loan-to-value ratio hurts the Korean homeowner more heinously than the Americans who�ve lost their homes in the sub-prime crisis: The price decline eats up equity first�the bank�s loan gets paid off in the repossession sale, with the homeowner getting what�s left. This means in the coming bubble deflation, years and years of hard-earned cash savings are about to be lost. In the States, people get dinged on their credit scores and lose a few thousand dollars on the down payment (and no-money-down buyers just lose the imaginary bubble gains)�in Korea, people are going to lose real, hard-to-replace cash.
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http://www.korealawblog.com/entry/koreas_own_coming_mortgage_crisis/
Conclusion: I think the bubble could pop at any time. I'm going on record on predicting that it WILL pop in 2009. With the economy going sour worldwide hurting Korean exports, massive unemployment currently and expected to get worse (three times as many complanies have declared bankruptcy in 2008 than 2007) and inflation in energy, utilities and food, households are just stretched too thin to justify the continued massive real estate bubble...and the whole house of cards is going to collapse.
People who were here in '97 and '98 all talk of seeing the phenomenon of seeing salarymen in suits just hanging out on the street all day because they couldn't tell their family they were laid off. Next year, it could be entire familites on the street after their house was repossessed. I think it's going to be a scary year. I hope I'm wrong, but reading that 90% of Koreans have ARM's makes it seem to me that a real estate crash WILL happen eventually. It's just a matter of time. And I'm calling my shot: 2009. What are your thoughts? |
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GoldMember
Joined: 24 Oct 2006
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| Posted: Tue Nov 11, 2008 6:34 am Post subject: |
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Stop being negative about Korea, you'll upset us apologists er realists.
My predictions:
Property prices are going to go up 200% next year
The won will go to 800 by next week
The KOSPI will go up 5000% before Christmas
Everyone in Korea will own a big black Chairman.
Koreans will own the USA by 2010. |
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Ruraljuror
Joined: 08 Dec 2007
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| Posted: Tue Nov 11, 2008 7:52 pm Post subject: |
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| eh? |
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Ruraljuror
Joined: 08 Dec 2007
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| Posted: Tue Nov 11, 2008 7:52 pm Post subject: |
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| eh? |
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Ruraljuror
Joined: 08 Dec 2007
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| Posted: Tue Nov 11, 2008 7:55 pm Post subject: |
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| eh? |
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Ruraljuror
Joined: 08 Dec 2007
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| Posted: Tue Nov 11, 2008 7:57 pm Post subject: |
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| eh? |
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Gamecock
Joined: 26 Nov 2003
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| Posted: Tue Nov 11, 2008 8:43 pm Post subject: |
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| Yeah, anyone who has bought an apartment in Korea in the last couple of years can pretty much count on selling it at a loss in the future. The housing market here is far beyond stupid. |
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kiteflyer
Joined: 27 Jan 2008
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| Posted: Tue Nov 11, 2008 8:51 pm Post subject: |
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| huh? |
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kiteflyer
Joined: 27 Jan 2008
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| Posted: Tue Nov 11, 2008 8:51 pm Post subject: |
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| huh? |
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kiteflyer
Joined: 27 Jan 2008
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| Posted: Tue Nov 11, 2008 8:52 pm Post subject: |
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| huh? |
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kiteflyer
Joined: 27 Jan 2008
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| Posted: Tue Nov 11, 2008 8:52 pm Post subject: |
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| huh? |
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kiteflyer
Joined: 27 Jan 2008
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| Posted: Tue Nov 11, 2008 8:52 pm Post subject: |
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| huh? |
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JongnoGuru
Joined: 25 May 2004
Location: peeing on your doorstep
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| Posted: Tue Nov 11, 2008 9:01 pm Post subject: Re: Scary Real Estate Inflation |
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| Ruraljuror wrote: |
| People who were here in '97 and '98 all talk of seeing the phenomenon of seeing salarymen in suits just hanging out on the street all day because they couldn't tell their family they were laid off. Next year, it could be entire familites on the street after their house was repossessed. |
Subway stations. They camped out all day in subway stations, not the street. So much so that at a few stations I saw, they occupied entire benches, there was literally nowhere for *real commuters* to squat but the ground. Now that may be alright for Koreans, but I find it... rather undignified, don't you? However, a far more riveting spectacle were the "I.M.F.-ed!" camps -- you know, with actual tents -- in central city parks for the temporarily jobless & homeless men. Not as grim and sordid a sight as one might imagine, the fellows inside managed to put a brave face on their predicament, some even waved and smiled and "hello!"-ed at me while hanging out their laundry as I walked past once. Still, good God, we don't EVER want to see that again. ...menfolk doing their own laundry, the idea! *gasp*
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| I think it's going to be a scary year. I hope I'm wrong, but reading that 90% of Koreans have ARM's makes it seem to me that a real estate crash WILL happen eventually. It's just a matter of time. And I'm calling my shot: 2009. What are your thoughts? |
An interesting and alarming post indeed, Juror. |
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ttompatz
Joined: 05 Sep 2005
Location: Kwangju, South Korea
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| Posted: Tue Nov 11, 2008 9:53 pm Post subject: |
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Kinda makes me glad I bought palm trees and white sand at 60 won per square meter when I did (last year).
Between the credit crunch, overinflated house prices, falling currencies and crashing markets I am glad that I don't have to sweat the big stuff or worry about having to re-finance in the near future.
. |
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bassexpander
Joined: 13 Sep 2007
Location: Someplace you'd rather be.
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| Posted: Tue Nov 11, 2008 9:57 pm Post subject: |
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Exactly right, juror.
My wife and I were looking to leave our school-subsidized apartment early (have to move closer to her job in Kangnam) but we decided to stay here as long as possible (Feb.). The housing market is insane.
What is happening now is everyone is renting and not buying, because the bubble is about to burst. Also, you have many apartment owners WANTING to lock you into a crazy-high rental rate contract for 1 year or more, because they ASSUME the prices will all come crashing down in the next 4 months or so. They're trying to limit their losses by locking you into something high right now.
So yes, the market is just insane. Absolutely freaking insane.
I really upset my wife by my bad behavior when we were apartment shopping last month. I outright laughed at one ajosshi who wanted a lot more than the place was worth. She was embarrased, and I felt bad about it later, but I found it hard to control myself. If he can find some sucker to pay his inflated price -- good luck. It's not going to be us!
We're still waiting. We know where we want to move, but prices have been jacked-up about 20% on the places we're looking at. |
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