Seoul Apartment Prices Overvalued by More Than 50%... Highest Bubble Level Ever Recorded

Richgo Develops 'Jeonse-to-Price Undervaluation Index'
"Historically Overvalued... Expected to Decline Over the Next 3 Years"

Photo by Asia Economy

As apartment prices nationwide continue to decline sharply, claims have been made that current apartment prices in Seoul are overvalued by more than 50% compared to their appropriate value. It is at an all-time high level of overvaluation, and it is forecasted that the downward trend will continue for the next three years.

According to the "Undervaluation Index Compared to Jeonse" developed by the AI-based real estate app service "Richgo" as of August 2022, apartment prices in Seoul were found to be overvalued by 51.2% compared to their appropriate price.

Richgo estimated the appropriate apartment prices through its proprietary AI system. The key indicators used in this process were the "Jeonse price" and the "sale price."

Since Jeonse (a unique Korean lease system) involves actual residence without investment demand, it is much more influenced by the real value and demand of real estate. Therefore, it is assumed that Jeonse prices are closer to the intrinsic value of real estate than sale prices. The "Undervaluation Index Compared to Jeonse" was created based on this premise.

Below data: Richgo

Richgo explained, "By comparing the five-year increase rates of Jeonse and sale prices, if the increase in sale prices is lower than that of Jeonse, it is interpreted that sale prices are still undervalued and have potential for growth."

According to this index, Seoul's undervaluation index compared to Jeonse last month was -51.2%. This means that sale prices are overvalued by 51.2% compared to Jeonse prices, according to Richgo's interpretation.

The Price Income Ratio (PIR), which is the ratio of housing purchase price to annual income, is also a key indicator for assessing housing prices. A PIR of 10 means that if one saves all disposable income for 10 years without spending a single penny, they can purchase a median-priced apartment.

PIR is based on income, and Richgo's PIR uses disposable income (income after deducting non-consumption expenses such as interest and social insurance premiums), allowing for a more accurate calculation.

According to this standard, Seoul's PIR in August 2022 was 25.5, the highest level during the comparison period (January 2004 to August 2022).

Richgo stated, "The average PIR during the comparison period was 17, so the current level is about 50% overvalued," adding, "Considering various indicators, current apartment prices in Seoul appear to be the most overvalued ever."

Richgo also forecasted, "While some argue that a shortage of new housing supply will prevent a sharp short-term decline, according to Richgo's AI future price prediction system, Seoul housing prices are expected to decline over the next three years."

Seoul Apartment Prices Fall at the Largest Rate in 3 Years and 7 Months

Meanwhile, amid rising interest rates and concerns over an economic recession, the nationwide real estate market has fallen into the worst transaction freeze in history, and Seoul apartment prices have dropped at the largest rate in 3 years and 7 months. Since turning downward on May 30, prices have declined for 14 consecutive weeks.

According to the Korea Real Estate Board, Seoul apartment prices fell by 0.13% this week (as of the survey on August 26), widening the decline compared to last week (-0.11%). This is the largest weekly drop since the survey on January 28, 2019 (-0.14%).

The real estate sales market is in the worst transaction freeze ever. According to the Ministry of Land, Infrastructure and Transport, nationwide apartment transactions from the beginning of this year through July totaled 205,970, a 52.4% decrease compared to the same period last year.

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