The burst of property bubbles is coming

Sejong City\'s commercial vacancy rate last year was 30.2%, much higher than the national average of 9.4%. Recently, Sejong City allowed the establishment of small-scale tourist accommodations in shopping districts around Naseong-dong and Eul-dong to address this issue. | Reporter Yoon Ji-won

It was in October of last year that Sejong City allowed the establishment of small-scale tourist accommodation facilities in Naseong-dong and Eojin-dong. The goal was to meet the demand for accommodations around the government building, but it seems that there was an ulterior motive. The idea is that attracting hotels to Sejong's empty shopping districts will help lower the nation's highest vacancy rate and increase utilization. The vacancy rate for commercial centers in Sejong stood at 30.2 percent last year, far higher than the national average of 9.4 percent. In other words, three out of 10 stores are empty in the city.

Nearby merchants, however, say they can expect difficulties from the purchase of shopping malls to build hotels. Hwang Hyun-mok, chairman of the Sejong Small Business Association, said, "Since there are articles saying that a hotel could be built here, the owners of the shops that have been sitting vacant are thinking that their lives will be turned upside down, so they're not going to lower the price of their shops below the selling price. They're thinking that they're going to make up for the losses they've suffered from not being able to get rent. Then, how could a hotel be built? At that price, they'll go somewhere with a bigger population and start a hotel business there."

Shop owners’ overdue debt keeps growing

In Sejong's shopping districts, the sale price, which was more than 30 million won per pyeong (3.3㎡), has recently fallen to half. In the third quarter of last year, the return on investment in Sejong shopping centers was only 0.51 percent, which was even lower than in 2014 (1.23 percent), when the government building relocation was completed.

A nearby real estate agent said that it is common to see shop owners holding out vaguely in Sejong.

The Bubble Triad: Shop owners-Banks-Appraisers

“Evergrenning,” repeated with sloppy mortgage valuation

Asset bubbles do not burst easily. The bubble bursting cycle, which follows a decline in value - a slowdown in transactions - a sudden sale - a hard sell, is slow to operate unless there is a strong impact. Usually the "short position” is taken when stock prices are expected to fall in the stock market, but it does not work well in the real estate market. With 70 to 80 percent of household assets being real estate, ordinary borrowers are more inclined to hold on to their property until they are about to suffocate with their debt.

Banks are helpers who help borrowers survive without handing over their bubble assets at a bargain price. This is where "evergreening" of bad collateral appears. Evergreening refers to the banking practice of turning a bad loan into a lively grass by extending maturities or making additional loans.

But in the field, the reassessment process itself works very loosely.

Banks can sustain its interest-earning business for a while through "evergreening" and have a seemingly sound balance sheet. However, on the back of the distorted book value, the risk of bad collateral lurks like a bomb that will soon explode.

General election D-day, save the bubble!

The government has also kept its policy of maintaining bubbles rather than deflating them. In the recent period leading up to the general election, there have been instances where financial institutions have attempted to voluntarily restructure their bad debts, only to be blocked by the government.

The government is mobilizing all measures to boost demand in the housing market to support housing prices. In 2022, policy instruments, such as expanding the size of emergency livelihood leases, allowing 80 percent of mortgage recognition ratio (LTV) for first-time home buyers, and special nesting loans exempting total debt principal and interest repayment ratio (DSR), poured out.

Lowering interest rates again at the height of bubble collapse?

"Household debt is taken as hostage"

Even if the government fully mobilizes its policy to maintain the bubbles, there is a limit to preventing the explosive power of indiscriminate monetary policy. In fact, with interest rates set to rise sharply in 2022, commercial buildings recorded 48,281 transactions in the first 11 months of last year, about 50,000 fewer than in 2021, and the national commercial real estate sales price in the third quarter was 3.3 million won per square meter, down significantly from the same period a year earlier (4.74 million won).

The problem is that the Bank of Korea could cut interest rates again this year. The market is already showing expectations for a key interest rate cut.

However, the way of keeping the bubble back at low interest rates comes with a price, and Japan went through that period.

Hwang Bo-chang, a researcher at the Korea Enterprise Evaluation Institute who specializes in real estate finance, said Korea could soon follow suit.

※This article has undergone review by a professional translator after being translated by an AI translation tool.