[EDITORIALS]Home Prices and Bubbles

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[EDITORIALS]Home Prices and Bubbles

The real estate market is showing some worrisome symptoms. Rental costs, which have crawled up since last fall, are rising at a faster rate. The average purchase prices for homes seems to be following the trend of rental costs. Although the trend is not nationwide, and it is not clear that construction is recovering, the signs of hype in the property market are very worrisome.

The unstable real property market stems from fundamental weakness in Korea's housing market, but failed government policies are also to blame. Basically, the annual supply of new houses has decreased by over 100,000 units today compared with the years before the 1997 Asian financial crisis. In 1998, the government abolished the mandatory proportion of small apartments, 20 percent, in apartment complexes. Larger apartment construction boomed, pushing up rental rates for small apartments. The government is recklessly giving grants to rebuild old apartment buildings, increasing demand for rental apartments by temporarily displaced residents. Prolonged low interest rates are driving money from financial markets into real estate.

A buoyant real estate market boosts housing construction, providing more choices for those who actually need a place to live, and contributes to the overall economic recovery. But this abnormal activity in the real estate market while the rest of the economy is depressed and during a normally slack real estate season leads to concern that a bubble is developing.

Once speculation erupts, it is difficult to deflate. But the government must act. To restrain the surge in lump-sum rental "key money" rates in Seoul, the government must spread out its approvals for redevelopment and spur low-cost housing development.

Since the government removed new apartment price controls in 1998, prices have surged by 40 percent. The government must reject the temptation to boost the economy by stimulating the construction industry.

Real estate prices are back up to the level before the economic crisis. If speculation is reignited now, Korea will never be able to escape from the high-cost, low-efficiency structure of our economy.
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