[Square] Questions You Should Ask Before Buying a House

Kwangsoo Lee, Senior Research Fellow at Mirae Asset

"I never expected Gangnam apartment prices to fall this much, even if other areas might be different. Every time I pay the loan interest, it burns my heart."

This is from a newspaper article in 2012. What is unimaginable now happened just 10 years ago. Articles predicting ‘real estate invincibility, rapid house price increases, and continuous price rises due to supply shortages’ are still common, but they were also abundant in 2006. If someone bought a house with excessive debt in 2006, they likely faced difficulties for a long time.

According to the 2020 Housing Survey, the average residence period for all households in South Korea was 7.6 years. When classified by occupancy type, owner-occupied households lived for 10.6 years on average, and tenant households for 3.2 years. By region, urban areas showed 10 years, and the Seoul metropolitan area 6.1 years. This data suggests that people tend to live in their own homes for more than six years on average after purchasing.

The issue is how to choose a house to live in for more than six years. First, we need to understand why house prices have been continuously rising recently. The most frequently mentioned reason is supply. However, housing supply is not a new topic. Looking at price change rates by region from January to July 2021, in Seoul, Nowon, Jungnang, and Dobong districts showed relatively high increases. In the Gyeonggi region, apartment prices rose significantly in Dongducheon, Osan, and Anseong. A common feature of these areas with high price increases is that they have mid-to-low priced apartments.

With the expectation of rising house prices reducing the number of listings, demand concentrated on mid-to-low priced apartments, especially among people in their 20s and 30s who could obtain loans, driving prices up. The most important indicator to watch for sustainability is transaction volume. In 2021, the average monthly number of apartment transaction reports in Seoul was 3,869, a 42% decrease compared to 2020. The Gyeonggi region also saw a 27% decline. Despite rising prices, transaction volumes fell because both listings and housing demand in the market have been continuously decreasing. The overall decline in housing demand may fundamentally be due to excessive increases in household debt.

According to provisional household credit data released recently by the Bank of Korea, household debt balance in the second quarter of 2021 reached a record high of 1,806 trillion won. In a low-interest rate environment, loan increases may be inevitable. The problem lies in the speed. In 2020, South Korea’s household debt growth rate was 9.4%, ranking first overwhelmingly among major countries. The ratio of household debt to disposable income, an indicator assessing the ability to manage debt, exceeded 170%, showing significant deterioration compared to OECD countries.

The biggest cause of the rapid increase in household debt is the rise in real estate loans. The increase in loans that rapidly boosted real estate demand can paradoxically lead to a rapid decrease in housing demand. If loan growth cannot continue, housing demand cannot keep increasing. Besides demand decline, the government’s housing supply plans must also be considered importantly. The government plans to supply more than 2.05 million housing units over the next 10 years through active supply expansion policies. Along with demand reduction, long-term supply expansion is likely to act as a factor stabilizing the market.

During the liquidity-driven market conditions caused by COVID-19 and others, news of record-high prices and highest growth rates was easily encountered. However, on the other hand, rapidly increasing household debt, domestic and international interest rate hikes, and massive supply expansion plans have also begun to be heard. At this moment, rather than being swayed by the saying ‘today is the cheapest,’ a fundamental question is needed. The starting point of that question should be found in the simple truth that ‘nothing under the sky lasts forever.’

Lee Kwangsoo, Senior Research Fellow, Mirae Asset

This content was produced with the assistance of AI translation services.