Time to heed the warning over real estate bubble

There is a growing concern that panic buying from people in their 20s and 30s has exceeded the dangerous level. Those in their 30s accounted for over 40 percent in apartment transactions in Seoul for the first eight months of this year. In some apartment complexes, more than half of the purchases were made by young people with debt accounting for almost 50 percent of the total price. These young buyers did not pay heed to warnings of a fall in house prices. They were afraid that they would not be able to climb the “housing ladder.” However, the effects of soaring house prices and household debt are too serious to ignore the possibility of a bubble burst. It is time to heed the warning that the real estate bubble is about to burst.

The International Monetary Fund (IMF) warned last month that global real estate markets are at risk of a steep fall as countries around the world are tightening their belts, increasing the possibility of an asset bubble burst. The IMF predicted that over the next three years, the house prices could decline by 13 percent in advanced countries and 22 percent in advancing countries, respectively. The Bank of Korea (BOK) said housing costs in Korea have increased too fast compared with major countries around the world, warning that Korea could bear the brunt of a fall in global asset prices.

The real estate market is already showing abnormal signs. As the government has begun to regulate loans, the so-called “housing transaction cliff” is showing in Seoul. Houses are not sold even at lower prices, leaving a glut of unsold houses on the market. Almost half of some new apartment complexes remain unsold. It is difficult to assume that the overall house prices have turned down but the number of potential buyers to support house prices is decreasing. With the ratio of household debt to gross domestic product (GDP) exceeding 100 percent, the government is expected to continue to tighten its monetary policy for the time being.

The debt incurred from panic buying is putting people in their 20s and 30s under pressure. The total debt-to-income ratio (DSR) of young people exceeded 37 percent, meaning that more than one-third of their income needs to be used to pay off debts. They might have to cut down on the daily living expenses, such as eating and buying clothes. If house prices fall, the house they bought may turn into a so-called “tin can” house, leaving a pile of debt. Getting a loan after considering one’s income and asset would be a reasonable option, but taking out an excessive loan out of fear will make it difficult to survive after a bubble burst.

However, young generations are not the only one to blame in this trend of buying a house with excessive debt. House prices have nearly doubled under the current administration. It is only natural that young people are anxious about not being able to buy a house if not now. However, the economic environment at home and abroad is too unstable and chaotic to belatedly engage in panic buying after watching house prices rising sharply despite numerous real estate measures. Young people should listen to the warnings of a possible fall in house prices and make rational purchases according to their own financial capacity. The government also needs to move away from its excessive confidence in public projects and continuously increase housing supply in order to remove factors that could negatively affect house prices.