[Viewpoint] Preparing a ‘Plan C’ for real estateMr. Kim is in his 30s, and he has always been a good student. He inherited an apartment from his parents that was worth tens of million won.
He sold the apartment and started a business. He worked long hours and lived a frugal life. He saved 500 million won ($405,800) in 20 years and took out 300 million won in loans. Finally, he managed to purchase a humble apartment in the posh Gangnam District. He secretly wrote a pledge on one corner of the front door: “I will become rich someday.”
Now that he has became a proud homeowner after working so hard for two decades, he has decided to renovate his new home. While painting the door, he discovers the faint writing: “I will become rich someday.”
This satirical cartoon was popular online in 2004, when housing prices soared. The comic and imaginative tale illustrates the impact of the real estate market on the life of a working-class citizen.
A new version of the cartoon about the impact of rising housing prices on a rich man’s life is quite different.
Mr. Park is in his 30s, and he is jobless. He inherited five apartments from his parents, and each was worth several tens of millions of won. He had never had a real job and loved to have fun. He spent 20 years drinking and dating. He got a loan from a bank by putting up the apartments as collateral. His lavish lifestyle cost him over 500 million won in 20 years. Finally, it was time to pay back the principal on his debt, so he had to sell one of the five apartments. After paying off all the debt, he was left with several hundred million won. And he is content because the other four apartments are each priced at several billion won today. He is busy planning the fun he’ll have tomorrow.
The stories of the two men are certainly exaggerated, but they teach us the same lesson. When housing prices rise, it is the working class who suffers. A former high-ranking government official who was deeply involved in the Roh Moo-hyun administration’s real estate policy said that the core of policy for the working class is housing. An administration that fails to offer a satisfactory housing policy is a failed administration, he said.
The government decided to expand financial regulations and tighten money flow into the real estate market because it knows too well how important it is to control fluctuations in housing prices. Some officials suggested watching how the situation turns out, since apartments remain unsold outside the capital and the construction industry has not yet regained momentum. However, housing prices are so flammable that as soon as they catch fire, it will quickly lead to a full-scale blaze. This year, over 25 trillion won in mortgage loans have been made, and the loans continue to increase every month. There are many tinderboxes on the market already.
The real estate market has calmed down for now. Last weekend, real estate brokers in Gangnam said there were very few inquiries from buyers. The government must be relieved. However, there are more problems to come, and the government has no more prescriptions to offer. An official confessed that the government was reluctant to tighten regulations initially, because if it does not work, then they would have no other solution.
Housing prices can be stabilized by controlling supply and tightening regulations. Supply control takes time. The Lee administration’s ambitious housing projects will be completed in two years. Regulations mainly cover three areas: interest rates, taxes and finance. The only quick measure is financial regulation. An interest rate hike might hold back the economic recovery. Not long ago, the Lee administration ended the “tax bomb” after calling it an undesirable legacy of Roh Moo-hyun. So it would hurt its pride to meddle with taxes again.
The market knows how the government operates. While the real estate market is quiet for now, once it is confirmed that the government is not committed to the fight, then the prices will begin to rise again. Now the government has only one choice. It needs to prepare a Plan C. When the Plan A of controlling supply and the Plan B of tightening regulation do not work, the government will have to make up its mind to tackle interest rates and taxes. It has to send a signal to the market that it is willing to raise the real estate ownership tax and even the interest rate. The administration does not have to worry about its pride. More importantly, it has to give the citizens confidence that it will not tolerate unreasonable housing price hikes.
It is not so difficult to pursue pragmatic centrism and a working-class friendly policy. If it helps the national interest, it might pay to make a left turn with the right turn signal on.
By Kwon Suk-chun, Park Yu-mi
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