ArmInfo.Haykaz Fanyan, director of the Modex consulting company, warns of the danger of a repetition of the "South Korean scenario" in Armenia and calls on the authorities to "blow off" the mortgage bubble in the real estate market.
"A few days ago, The Economist published an article entitled "South Korea's housing crunch offers a warning for other countries" , Fanyan wrote on his Facebook page. So, in December 2022, compared to the previous month, prices in the Korean real estate market decreased by 2%, and compared to October 2021 (during the peak period), the decrease was 24%.
<Two circumstances gave me the impression that this article is a description of the post-war (Russian- Ukrainian) situation in Armenia: 1. In Q4 2022, final consumption in the private sector in Korea fell by 0.4 percent, while exports in January 2023 compared to January 2022fell by 17 percent. This is what awaits us after the end of the Russian-Ukrainian war. 2.Households are overburdened with debts/credits; debts exceed y-o-y disposable income more than twice. Our economy is moving in this direction as a result of a rapidly growing portfolio of mortgage loans>, the expert noted. According to Fanyan, unlike Korea, where the Central Bank tried to contain the overheating of the economy and inflation (including demand for real estate) by raising the refinancing rate from August 2021, this toolkit has a very limited impact on demand in the primary real estate market of Armenia, since the in most cases, the actual payer of interest on the loan is the state. In other words, as the economist explains, if the mortgage interest rate increases, more income tax is returned from the state budget, if, of course, the income tax of the borrower allows it. "The experience of other countries suggests that our government and the Central Bank should be more prudent and use various tools to contain the inflation of the "bubble" in the real estate market," Haykaz Fanyan concluded. It should be noted that economic activity in Armenia in 2022, according to preliminary data, was 14.2 percent. Growth was driven not only by trade and services (17% and 28.2%, respectively), but also by the construction industry (12.5%), which in turn is largely related to the income tax refund program for mortgage loans in the primary market, which is still in effect. The Korean real estate market is characterized by a kind of rental system - chonse. According to ASIA Business Blog, its purpose is that the tenant pays a large amount of money to the property owner as a deposit for the entire lease period, which is usually 2 years. This deposit typically ranges from 50% to 80% of the value of the property, the entire amount being fully refunded to the tenant at the end of the rental period after 2 years, with the tenant paying nothing as regular rent. It was the chonse system that caused the rise in real estate prices. At the moment, the chonse system makes up about 62% of all apartment rental contracts in Seoul. At the same time, many Koreans take loans from banks, as they do not have their own funds to pay the entire amount of chonse. Despite the fact that such a system is effective in itself, according to experts, there are certain risks. A real estate market dominated by chonse rentals will inevitably be subject to rising prices due to repeated reinvestment schemes - "gap investment". Many landlords, having bought a property, immediately find a tenant who pays a deposit, and as a result they pay only about 30-40% of the cost of the premises. At the end of the lease period, the premises are sold at a higher price, since prices in the market rise over 2 years, and thus the lessee earns an income
In this case, the landlord invests the tenant's deposit in the new property. Particularly undertaker landlords make "intermediate investments" with several apartments or houses at once. In the event of a fall in prices, the bankruptcy of the landlord may result in the loss of all paid deposits. Of course, the tenant can also be lucky - in that case, when the contract is extended, he will receive the difference in deposits, but, accordingly, if the prices rise, the tenant must pay the difference.
Tenants often take out a loan with a floating interest rate to make a large deposit, the growth of which also creates an unstable financial position for tenants. The risk arises as a result of the fact that landlords, in turn, can take out a mortgage on real estate. Thus, the whole system has an internal incentive for real estate prices to constantly rise.
