Home prices surge

Case Study: San Francisco and Seoul

2018.10

Home prices surge: Case Study_San Francisco and Seoul
Home prices surge
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I. Global Real Estate Markets Booming Again

Housing prices are rising fast around the world.

  • According to the IMF, the Global Real House Price Index was at 160.1 in the 4th quarter of 2017, which surpassed the prior peak of 159.0 points in the 1st quarter of 2008. The previous peak of 159.0 occurred immediately before the subprime mortgage crisis in 2008, which was due to financial derivatives based on mortgages.
    • Global Real House Price Index: A GDP-weighted and inflation-adjusted average across 63 countries, measured as deviation from prices in the 1st quarter of 2000.
  • In terms of housing price growth compared against last year, the U.S., Europe and Asia recorded the highest rates.
    • Hongkong had the highest price increase with 11.8%, while Ireland was at +11.4%, Thailand was at +6.4%, the U.S. was at +3.9%, China was at +3.2%, and South Korea was at +0.3%.

The large increases in housing prices are due to corporations, funds, and wealthy individuals aggressively buying up real estate properties in big cities.

  • Low interest rates: Major economies around the world have maintained low interest rates and monetary expansion as a policy, resulting in the influx of large liquidity into the real estate market.
  • Corporations buying real estate: Emerging and major economies in good shape have companies, particularly in tech, which are buying large real estate properties in major cities to use for office space and attract talent.
  • Real estate attracting investment: Economies with low growth rates have local wealth and speculative funds eager to buy real estate as an investment strategy.

Notably, housing price growth rates are at record high levels in major cities where businesses are concentrated, such as San Francisco, Seoul and Hongkong.

  • San Francisco: In San Francisco, an ordinary middle-class house costs over ₩2 billion. An old, single-floor house near Stanford University is in the market for ₩4 billion to ₩5 billion, and a two-room apartment is being rented at ₩4 million to ₩6 million per month, with some areas seeing a 40% jump in price over a year. Despite the high prices, once a house is put up for sale, it is sold within 2 to 3 days.
  • Seoul: The average price of an apartment in Seoul is ₩600 million, which is a 30% to 40% jump from 2014. Office workers in Seoul need to save money for approximately 20 years to buy an apartment in the city. However, due to apartment prices outpacing wage increase rates, it is becoming increasingly difficult for the average office worker to buy an apartment in Seoul. Despite the high prices, apartments up for sale are sold within 1 to 2 days.
  • Hongkong: Housing prices in Hongkong are extremely high. For example, a 5.9 pyeong (209 square feet) apartment was sold for ₩1.1 billion (₩180 million per pyeong). Housing prices are increasing at a yearly average of 15 to 20%, among the highest in the world. Considering the average monthly wage in Hongkong is ₩2.4 million, buying a house is a near impossible dream for the locals.


II. Characteristics of Housing Price Increase in San Francisco

For the past 4 to 5 years, housing prices in San Francisco and the Bay Area have been rising so fast that it has become a serious social problem.

  • Due to high rents and the overall cost of living, someone earning ₩100 million is considered to be in the low-income bracket in San Francisco.

The fundamental reason behind the [1] skyrocketing housing prices is an inadequate supply of places to live.

  • Rapidly increasing population: With Big Tech companies in the Silicon Valley area expanding their facilities by 2 to 4-fold, including Facebook, Google, Nvidia, and Microsoft, talent from around the world is pouring into the San Francisco Bay Area.
  • Complete inadequacy of supply: In the case of the Bay Area, the local government and long-time city residents are strongly against building high-rise apartments (over 10 stories). As such, only a limited number of small apartments (4-5 stories) are being built. Put simply, for every 1,000 people funneling into the city, 200-300 new houses are supplied. This is a form of NIMBY (Not In My Back Yard), as the local government and original residents are convinced that the culture of Silicon Valley is based on open views and a large supply of green space.

Recently, wealthy Chinese people are on a buying spree in several major cities, purchasing new houses and properties and further fueling the price increases.

  • Wealthy Chinese people are paying cash for properties in San Francisco, averaging around ₩2 billion per property, to provide their children with houses where they can live in the future.

As a result of the drastic price jumps in real estate, long-time San Francisco residents have had to move elsewhere and recent college graduates just starting their professional careers have been pushed to the outskirts of the city, creating various social problems.

  • Original San Francisco residents can no longer afford the rapid rise in rent for their businesses and housing in the city. As a result, an increasing number of these people have been forced to give up their places of residence or the livelihoods. Consequently, San Francisco is seeing a large increase in the number of people experiencing homelessness, as well as increased crime rates. (e.g. car break-ins, where a thief breaks the car window and steals items)
  • For young professionals hired by Big Tech companies, the cost to rent property near their place of work is often too expensive. Many of these people are forced to find places to live on the outskirts of the city. This makes traffic much worse, which, in turn, increases social costs and makes the economy less efficient.


III. Characteristics of Housing Price Increase in Seoul

Housing prices in Seoul are rising just as fast as they are in San Francisco.

  • In Seoul, many people believe that buying their own home with savings from monthly wages is impossible – only people [2] born with a silver spoon will be able to own property.

Housing price increase in Seoul is led by speculative funds which see houses as investments.

  • Population increase and housing supply: In contrast to the situation in San Francisco, Seoul has not had a steep increase in the number of jobs and people coming into the city. The housing supply is not particularly limited, as the city continues to build large apartments well over 4-5 stories. As we can see, large increases in population size and an inadequate supply of housing are not driving increases in apartment prices.
  • Speculative funds: More and more people believe that apartments in Seoul are high-return and low-risk investment opportunities because their prices will never go down. As such, a lot of people are taking out loans from banks to buy apartments in the city. This is the speculative driving factor behind the rising demand for apartments in Seoul.

Housing prices are excessively high for the country’s yearly average income. The rapid housing price increase is a serious issue that is degrading the competitiveness of the city and the nation.

  • High apartment prices make it difficult for newly married couples to purchase an apartment, which lowers marriage and birth rates South Korea has the lowest birth rate among OECD countries.
  • As young people get pushed to the outskirts of the city, massive economic inefficiencies are being generated from increased commutes Traffic in Seoul is considered to be in the top 10% of worst traffic in OECD countries.
  • Seoul has not yet seen large increases in the number of people experiencing homelessness or crime rates. However, young people are losing faith in the city and are considering moving to other countries more than ever before.


IV. Lessons

The fundamental causes of large increases in housing prices are demand outpacing supply and an upsurge in speculation.

  • Demand-Supply: Demand will increase where business opportunities are concentrated. Failure to meet this increased demand with a matching increase in supply in the area causes housing prices to skyrocket, while prices in the surrounding areas decrease.
  • Speculation: As people begin to view houses as assets for investment instead of essential needs for survival, speculative purchases cause a surge in housing prices.

The negative effects of increased costs of living in major cities are disproportionately impacting the disadvantaged members of society, creating various social issues.

  • Young people, the middle class and original residents are being pushed out of the downtown areas.
  • Other social problems have been observed, including rising crime rates, lower marriage/birth rates, and higher social costs.

Governments have tried to step in to solve the housing problem, but they have had limited success so far.

  • Although national and local governments are pursuing policies to thwart speculation, they have been either outmaneuvered or met with stiff resistance.
    • San Francisco: Although the state government is strengthening regulations against Chinese speculation in the real estate market, the situation has seen little improvement as wealthy Chinese people still make cash payments for properties.
    • South Korea: The national government is trying to curb speculation with new mortgage regulations and taxes for people who own multiple houses. However, the new policies have been met with resistance and failed to lower housing prices.
  • Policies are being developed to increase supply, although views differ on their effectiveness.
    • South Korea: The national government plans to increase the supply of housing by building new cities on the outskirts of Seoul. However, this will not increase supply within the city itself, raising doubts about whether the policy will be able to decrease prices in Seoul.
    • San Francisco: Big Tech companies, the main culprit behind skyrocketing housing prices, have stepped up to build their own housing units near the company sites. However, the amount of supply is nowhere near enough to decrease housing prices and lower rent in the city. As such, it is unlikely to solve the problem.


What should be done to deal with the housing price increases around the world? Talk with your Ringle tutor about these questions as you improve your English skills.

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