[Financial Planning for the 100-Year Life] Can a Single Home Secure a Long Retirement?

Changhee Kang, Representative of Truston Asset Management Pension Forum

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Generally, the period in a person's life when they have the most wealth is in their 50s. According to the Household Financial Survey results released by Statistics Korea in March 2022, the average total assets per household for people in their 50s in South Korea was 642 million KRW. This reflects the high housing prices in Seoul and the metropolitan area. However, household debt is also significant. The average total debt per household is 108 million KRW. The net assets, calculated by subtracting debt from assets, amount to 534 million KRW. Having net assets of around 534 million KRW in the late 50s might lead one to think, "I can probably live reasonably well in retirement." However, out of the 534 million KRW in net assets, the real estate appraisal value (mostly owner-occupied housing) is 495 million KRW, accounting for nearly 80% of total assets. The available net financial assets excluding real estate amount to only 39 million KRW, which is far from sufficient for living expenses over a retirement period exceeding 30 years.

Can a single house support a long retirement? Comparing the formation and collapse of the real estate bubble in Japan, which is about 20 years ahead of us in becoming an aged society, with the recent situation in South Korea, concerns outweigh expectations. In the 1980s, Japan experienced a boom in corporate and household real estate investment due to policies aimed at mitigating the adverse effects of a rapid yen exchange rate increase. The land price index for residential land in Japan's three major cities (Tokyo, Osaka, Nagoya) recorded 291 in 1991, the peak of the real estate bubble, nearly tripling in less than 10 years from 100 in 1982. This land price index fell to 102 in 2012 after the bubble burst and currently hovers around 120.

The collapse of housing prices was even more severe. An acquaintance who purchased an apartment for 120 million JPY in 1984 saw its price rise to 360 million JPY at the 1991 peak, then decline, falling to around 30 to 40 million JPY in the early 2010s. Since then, there has been little change in market prices. Even if sold, the price would barely cover one year's living expenses.

Experiencing this real estate bubble collapse has significantly changed Japanese people's views on homeownership. Unlike us, current Japanese people are not as obsessed with owning a home. The prevailing attitude is, "So what if you don't have a house? You can just rent." This contrasts sharply with the recent atmosphere in South Korea, where many believe that if you can get a loan from a bank, you must buy a house no matter what.

As mentioned earlier, during the 1980s real estate bubble, Japanese people were as obsessed with owning their home and land as we are now. However, after experiencing a long-term recession following the bubble burst, their mindset changed. The urbanization process has ended, and there is even a reverse migration trend from cities to rural areas. The baby boomer generation's homeownership phase has also concluded.

So, what will happen to South Korea's real estate market in the future? Although prices have been declining since last summer, the long-standing myth of real estate invincibility built over decades will not disappear easily. In Japan, it was difficult to determine whether the decline was temporary or a long-term recession until 6 to 7 years after the bubble burst.

However, as the decline period lengthens, many people will become aware of the changing environment surrounding real estate. Moreover, the trends of low birthrate and aging are progressing much faster in South Korea than Japan did in the past. It is problematic to have assets concentrated in one place. Efforts are needed to reduce the nearly 80% share of real estate and increase financial assets. Taking on excessive debt to buy a home is also inadvisable. For households without alternative retirement funding methods, it may be necessary to boldly consider utilizing reverse mortgages.

Kang Changhee, Head of Pension Forum, Truston Asset Management

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