International Law

Housing Bubble: Home Supply Down 30% in 2008

The Maeil Kyungjae’s English edition reports next year’s housing supply will be down 30% over 2007, thanks to Roh Moo Hyun’s housing policies which include punitive taxes on homeowners, and price controls on new units:

Housing supplies are expected to decrease 30 percent next year compared to this year.

According to a joint survey conducted by Maeil Business Newspaper and a realty information agency Dr.Apt on December 20 on 363 housing construction companies regarding their 2008 initial sales plan which includes apartments, commercial & residential complexes, studio apartments and town houses, total 323,544 apartment units were revealed to be supplied in 602 business sites—28.6 percent lower than the 453,589 units planned for this year.

Such a sharp decrease in housing supply is a consequence of construction companies retiring from their new business projects with the adoption of the initial sales price cap.

But in the Korean-language version of this story at the Maeil Kyungjae, a detailed breakdown of the decline in units coming on-line in 2008 reveals that although there are steep declines in new supply outside Seoul and Taejon, the supply in Seoul will increase a bit more than 16% in 2008 (21,642 units to be sold in 2008, compared to 18,174 in 2007). Considering there are already 100,000 unsold units nationwide, over 90,000 of which are in the provinces, this decline seems natural and inevitable. They overbuilt out there, given where everybody wants to live is Seoul. And it’s a relief to see that the supply in Seoul has not been completely choked off—in fact, it’s still going up.

But note that housing supply is a trailing indicator. Korean apartment complexes take about three years from ground-breaking and the initial concrete pouring to completion and occupancy/sale. My guess is the real bite of Roh’s housing-market meddling will be felt in Seoul between 2009 and 2012. My own interpretation of the post-2002 run-up in Korean housing prices is that it was one of the inevitable aftereffects of the 1998-1999 “IMF” contraction. Remember when all those construction companies went bust or nearly so? Well, they had difficulty getting finance for new housing starts, which meant they couldn’t build as many new apartments as Korea really needs.

What’s really odd is how few apartments (and other units of new-built housing) are made available in Seoul.

Assuming that “Seoul” means the city limits under the direct control of Seoul Metropolitan Government, and not the Incheon-to-Suwon-to-Uijeongbu conurbation around Seoul, we can see that one out of four Koreans lives in the City of Seoul. (If you count the greater metropolitan area, it’s one of two.)

Yet even with the 16% year-on-year increase in inventory, 21,642 units in Seoul accounts for just 6.7% of the new housing being made available nationwide.

So while the US$2.5 million 900 sq. ft. apartment in Kangnam may experience a little air (okay, maybe a lot) being let out of its price, I foresee continued inflation of the housing bubble for the rest of Seoul, when the supply of apartments to us in the capital takes the same steep downturn as the provinces are experiencing now.

I just hope I can sell my apartment and cash out before the storm.

Full post as published by Korea Law Blog on December 22, 2007 (boomark / email).