[The Editors' Verdict] Why the Housing Market Three Years from Now Is Cause for Concern

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Recently, as the actual transaction prices of apartments in Seoul have shown a rebound, there is a growing outlook that the market sentiment is changing. Some argue that the housing market has entered a phase of ‘bottoming out,’ with an increase in housing transactions in Seoul and a reduction in price declines.

Supporting this view, a survey by the Korea Real Estate Board showed that apartment prices in Songpa-gu rebounded for the first time in 11 months, and the Apartment Pre-sale Outlook Index for March, surveyed by the Housing Industry Research Institute under the Korea Housing Builders Association, rose to 73.6, marking five consecutive months of increase since October last year. Additionally, analysis indicates that high-priced apartment transactions exceeding 1.5 billion KRW in Seoul jumped more than threefold from 275 cases in the fourth quarter of last year to over 1,000 cases in the first quarter of this year. Monthly figures also show a rising trend, increasing from 118 cases in December last year to 220 in January, 400 in February, and 401 in March.

Both the government and private economic research institutes have been issuing forecasts for a soft landing of housing prices in the second half of this year. Minister of Land, Infrastructure and Transport Won Hee-ryong stated, "We expect housing prices to stabilize downward by the end of the year," and Hyundai Research Institute indicated that the real estate market is likely to maintain a stable range in the second half, achieving a soft landing in an ‘L-shaped’ pattern.

However, the opinion of a real estate expert I recently met was different. While the current stability may appear to be a result of the base effect from the previous rapid price surge, there is a possibility that housing prices will surge again in three years. The expert pointed to three key leading indicators of the housing market: permits, groundbreaking, and pre-sales.

Focusing solely on the Seoul apartment market, which is a barometer of housing prices in Korea, last year’s housing permits in Seoul hit the lowest level in 13 years. The 2022 housing construction permits in Seoul totaled 42,724 units, about half of the 2021 figure. This is the lowest since the financial crisis year of 2009 (36,090 units) and approximately 30,000 units lower than the average annual permits from 2009 to 2022. This trend has continued this year as well. Permits for January and February totaled 8,583 units, down 12.4% year-on-year. Groundbreaking decreased by 62.6%, pre-sales by 20.2%, and completions by 48.2%.

Typically, housing permits and related figures serve as leading indicators for the housing market about 3 to 5 years later, as the construction period after permits is generally considered to be around three years. Some might question the need to discuss three years ahead when the current market is facing issues such as unsold units and jeonse fraud ‘time bombs.’ However, the problem is that continued declines in permits could lead to a future supply shortage.

Looking back, one year after the inauguration of the Moon Jae-in administration in 2018, the total housing permits nationwide were 554,000 units, lower than both the previous year and the recent five-year average. Groundbreaking and pre-sale figures also declined. In particular, Seoul’s permits decreased by 41.9% compared to the previous year and by 23.9% compared to the five-year average. From 2018 to 2022, the number of apartment pre-sales in Seoul (general sales basis) was 32,559 units, which corresponds to only 0.35% of the population (9,427,583 people). This means one unit was supplied for every 300 people. During this period, housing prices in Seoul more than doubled.

This is why the government needs to establish long-term supply policies to eliminate market uncertainties and sustain housing price stability in the future. Three years from now will mark the end of the Yoon Suk-yeol administration. Hopefully, the real estate policy mistakes that became a pretext for regime change will not be repeated in this government. Without policies supported by a long-term perspective, the burden will inevitably fall entirely on the demand side.

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