Imagine the trials of Kim, a salaryman in his early 40s, when he looks at the newspaper. Pleased to see that the value of his apartment rose W150 million over the year, he is plunged into uncertainty when he reads news reports that warn of a possible collapse of the real estate bubble (US$1=W938). Kim took out loans worth W300 million early last year to buy the 100 sq.m apartment. He knew the loans were large and he had to bear a huge interest burden, but he was tempted when he saw people around him make a fortune out of their apartment purchases and became afraid that he might never own a home if he didn't buy now.
Assuming the principal remains unredeemed for five years and principal and interest are payable over 20 years, he pays interest of W1.3 million a month. But the apartment price lists indicate that he is earning W10 million a month. So surely he has made an excellent investment decision. He was elated last year: "You can't go wrong with real estate investment," he thought. But lately he started to worry. "Honestly, I have mixed feelings," he says now. Naturally, he wants the price to remain stable.
These worries are more explicitly expressed by government officials, monetary policy makers and economists. Some economists lament that housing prices shouldn't really have gone up last year; monetary policy makers are worried that the real estate bubble is growing. They point out that property prices have been on the rise ever since the current administration took office -- and then they rose even more! A bubble on top of a bubble, as it were. Housing prices went up 11.6 percent nationwide last year, the most since a 16.4 percent surge in 2002. Apartments in Seoul were priced at W7.78 million on average per 3.3 sq.m four years ago, but that soared to W12.87 million early last year. Even if apartment prices rise at a more steady ratio, it makes a big difference in terms of the money people have to pay for every per 3.3 sq.m. In short, they have to continue to bet for ever higher stakes, just like in a poker game.
What's worse, property prices started to soar in middle-class areas outside the affluent Gangnam area in southern Seoul last year, forcing middle-class people to jump on the runaway train. So far they managed to make ends meet, though it wasn't easy. After making interest payments, which are not small at all, they are left with very little to spend. What's more, mortgage interest rates started to climb at the end of last year, making their life even harder. Now that the train seems to be slowing down, it makes them feel even more anxious.
There is no way of knowing exactly by how much real estate prices are inflated, and it is even more difficult to predict when the bubble will burst and how far prices will tumble. Some loan officers in banks forecast that housing prices will go up even further this year. It could happen, and there might be investors who make money from that. Our only hope is that government officials and monetary policy makers don't repeat the mistakes they made this year, and then complain that prices "shouldn't have risen" a year hence. The bigger the real estate bubble grows, the faster it will collapse and the harder the life of ordinary people will become.
