Bae Moon-seong, a bond analyst at Eastspring Asset Management and the author of ‘Determination to Study Real Estate,’ said, “Korea and China’s housing rental yields are the lowest in the world, but housing investment continued with the belief that house prices will continue to rise.” He said, “If a policy to expand housing supply, such as new town development, is implemented during a boom in real estate, land compensation can be released and house prices can be stimulated.” The following is a question and answer.
-There was a PF suspension from Legoland.
“During the Legoland crisis last year, demand for institutional bonds plummeted. Secondary financial institutions such as capital companies do not have a receiving base, so they can only raise funds by issuing bonds. When this happens, no matter how many assets there are, they are bound to collapse. At the time, the government was able to overcome the liquidity crisis with active support. The current market concern is how long the liquidity crisis will be overcome through government support. Construction companies and securities companies have made a lot of profits until 2021, so they have the strength and cash to endure even if the market is not good for a short period of time. Looking back on the past, there were signals from construction companies that something was not right from 2006 to 2007, but it was in 2011 to 2012 that problems eventually broke out. Chain bankruptcies of mid-sized construction companies and savings banks were issued. The real estate PF issue will continue to be a problem over a fairly long period of time.”
-How do you view the unsold problem?
“Recently, the number has increased to 75,000. Looking at the long-term average since 2000, about 70,000 unsold units are not a problem. About 400,000 to 600,000 units are supplied annually, and considering floor trends, 10 to 20% of units can be unsold at any time. In some ways, 70,000 units can be seen as a normal range. In 2008, there were over 160,000 issues. Unsold units soared as builders pushed out sales. If the number of unsold units decreases sooner or later, it will not be because the economy is improving, but because construction companies are not selling them because they are concerned about unsold units.”
-Globally, Korea is leading the decline in house prices due to interest rate hikes. Some point out that Korea is vulnerable to interest rate hikes due to its high household debt.
“Foreign credit rating agencies such as Moody’s annually cite North Korea, population aging, and household debt issues as South Korea’s weaknesses. Reducing household debt is absolutely necessary to strengthen financial soundness. The problem is that in order to reduce household debt, it is necessary to stop buying a house with excessive debt. On the other hand, to prevent a hard landing in real estate, it is necessary to increase home loans. It is not an easy task.”
– How do you view the reconstruction market?
“Even if the population declines or there is a recession, there will still be demand for new apartments. The expansion of reconstruction supply will contribute to price stabilization in the mid- to long-term. Reconstruction can also play a role in preventing a sharp drop in jeonse prices. Reconstruction presupposes the loss of existing housing stock. In January 2025, more than 12,000 Dunchon Jugong households will move in. If the destruction of housing for reconstruction takes place around that time, the shock of the sharp drop in jeonse prices will be mitigated. However, reconstruction efforts may not be as fast as expected. When the surrounding market price drops, the union members’ contributions increase, and in such a situation, it is not easy to speed up the reconstruction.”
– Will Gangnam’s popularity last?
“There is a lot of demand for charter rentals in Gangnam or Mok-dong, even if they are forced to move for their children’s education. However, the number of people moving out of Gangnam after finishing the entrance exam is increasing more than the number of people moving in. This is due to the low birth rate and aging population. We believe this can weaken Gangnam’s excess demand in the mid- to long-term. “
– What is the relationship between jeonse price and interest rate?
“The starting point for the jeonse market is monthly rent. The jeonse price eventually fluctuates depending on the monthly rent. If the monthly rent does not change, when the interest rate rises, the jeonse price falls and when the interest rate goes down, the jeonse price rises. In other words, if there is no change in monthly rent, the jeonse is just a bond. However, what affects monthly rent are income and housing supply. When income rises, of course, rent also rises. If there is too much supply, the monthly rent will also rise. Monthly rent is determined as a function of income and housing supply. The jeonse changes according to the interest rate after the monthly rent is set.”
-What is the cause of the surge in jeonse prices in 2020?
“At that time, the 3rd Lease Act was introduced. If the price control policy is implemented in a textbook way, the price will inevitably be divided. There are people who benefit from controlled prices. On the other hand, if you do not benefit from the control price, you have no choice but to pay a price higher than the market equilibrium price. Although the law was introduced with good intentions to stabilize the jeonse price, this is why the results depended.”
– Korea and China have the lowest rental yields in the world.
“Traditionally, the monthly rental yield has been lower than the market interest rate. Nevertheless, the reason for the high demand for housing investment is the strong belief that house prices will rise. In Korea and China, apartments are a kind of store of value. Looking at the past trend, the price continued to rise, so the low monthly rental yield was not a problem. The absence of alternative investment destinations also strengthened belief in the upward trend of real estate. In the case of the US, there is a strong belief that stocks will continue to rise in value. I prefer the stock rich rather than the housing rich. In addition to the perception that it is difficult to make money in the stock market in Korea or China, a perception has been formed that it is more advantageous to own a house even if the rental yield is low.”
– There is also a debate about the continuation of the Jeonse.
“The interest rate on deposit loans is very low among market rates. This is because the government supports it through policy. As a result, there is a common belief that jeonse is cheaper than monthly rent. But now, as interest rates have risen sharply, monthly rent has become cheaper than jeonse. Which of the jeonse and monthly rent is more advantageous to consumers depends on the interest rate. The charter has traditionally been risky, like the villa king fraud. When the number of occupants increases, a reverse trend occurs. The perspective itself on the premortal life itself will change significantly.”
-What policies are needed to stabilize house prices?
“It is clear that having a stable supply will also help stabilize prices. There was a lot of supply in Seoul during the housing price surge in 2020. However, demand has soared due to low interest rates. House prices are not determined by supply alone. House prices, income and interest rates are also important variables. One aspect should not be overemphasized. DSR (Total Debt Repayment Principal Interest Repayment Ratio, Loan Restriction System According to Income) has been discussed since 2019, but it was postponed for one reason or another, and it was introduced from the second half of 2021. I think the DSR is clearly effective in reducing housing demand. If the skyrocketing house price was caused by liquidity, it is necessary to manage liquidity delicately. It is regrettable that if DSR had been introduced earlier, the increase would have been slightly reduced. The continued supply of new housing is, of course, important. However, the problem is that the supply expansion plan takes a lot of time until the actual move-in. When something like the 3rd new city is announced during the real estate boom, reports follow that the market stimulates house prices by releasing land compensation rather than accepting it as a signal of price stability due to long-term supply expansion. In the end, policies that contribute to supply expansion can alleviate volatility if implemented at a time when housing prices are stagnant. “
-Is the price of the house reasonable?
“There are several valuation tools that describe stock prices, but they are for reference only. It is not possible to create a sophisticated tool that accurately evaluates the value of a home. However, in the case of advanced countries with a deeper financial history than ours, the monthly rental yield and the market interest rate cannot be significantly different for a long time. If there is no particular favorable factor for a sharp rise in rent, but if the rental yield is lower than the deposit interest rate, I think it is difficult to maintain such a price. In Korea, the actual transaction price of jeonse and monthly rent has been disclosed since 2011, and the rate of return on apartment monthly rent has maintained a level that is about 1%p higher than the standard interest rate. This time, the key interest rate has risen too quickly in a short period of time, so it is higher than the monthly rental yield. I think this needs to be resolved to some extent before we can start investing in housing.”
※ This interview is the personal opinion of Analyst Bae Moon-seong and has nothing to do with the position of the company (Eastspring Asset Management).
