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Disaster Piles on Disaster in Real-Estate Policy

Apartment prices continue to soar and a dearth of rental or lease homes is driving young Koreans to low-rise apartment complexes. As a result, even these homes that were long considered infra-dig for the aspiring classes are now starting to be priced out of most ordinary people’s reach.Last month, 5,424 low-rise apartments were sold in…

Apartment prices continue to soar and a dearth of rental or lease homes is driving young Koreans to low-rise apartment complexes. As a result, even these homes that were long considered infra-dig for the aspiring classes are now starting to be priced out of most ordinary people’s reach.

Last month, 5,424 low-rise apartments were sold in Seoul, up 62 percent compared to two years ago. They even overtook sales of high-rise apartments in Seoul in January for the first time ever, and and the trend still continues. In Incheon and Gyeonggi Province, 3,000 to 6,000 of these units were sold a month on average so far this year, and their average price had soared to W330 million as of May (US$1=W1,134).

The reason is a dire housing shortage. The number of apartments available for jeonse or Korean-style deposit lease in Seoul fell to fewer than 20,000 in mid-June, down more than 50 percent from a year ago. But when the property bubble bursts, as it eventually must, the prices of low-rise units will be the first to give way, which means that many young people and low-income earners could find themselves with negative equity on their hands.

The increase in jeonse and rents slowed temporarily late last year but started to speed up again recently, raising concerns of a second shock. The weekly rate of growth increased from 0.02 percent in late April to 0.11 percent last week. Jeonse prices in Seoul have been rising for 103-straight weeks.

But the ruling party continues to roll out policies that will cause sale prices and rents to soar even higher. The party’s decision announced last week to levy punitive real estate taxes only on apartments in the top two percent in terms of value was not aimed at stabilizing the real estate market but rather to win votes. If the new regulation is applied, there will be a rush on apartments whose prices are not in the top two percent, which will of course go through the roof. The same vicious cycle is being repeated over and over by this hopeless government.

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