[Viewpoint] Damned if it does ...

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[Viewpoint] Damned if it does ...

A childhood friend of mine is an executive at a financial company and lives in Gangnam, southern Seoul. He was born in downtown Seoul and moved to the high-priced apartment district 10 years ago. He bought an apartment in Daechi-dong in the late 1990s with a loan, paying a total of 300 million won ($252,000), including tax.

Property prices in the southern parts of the capital have skyrocketed since then, and by 2006 his home was worth over 1 billion won. Other friends groaned with envy, asking their rich friend to buy them rounds of drinks. One time, when a friend expressed envy, he told us off. “It isn’t only my house’s value that went up,” he said. “All home prices in Gangnam shot up. I just broke even.”

Most of my friends and I live in northern sections of Seoul. Our home prices barely moved, while apartment prices in southern districts more than doubled. We weren’t convinced by our friend’s argument, but we didn’t mention apartment prices to him again.

Our friend was then an ardent free market proponent. He lashed out at then-President Roh Moo-hyun’s real estate measures. He said that half-baked taxes and regulations would only fan speculation. He also argued that increasing housing supply to provide alternatives to Gangnam - favored largely for its excellent education infrastructure - would solve the problem according to market principles. And the government didn’t even need to worry about the supply side of the market, he claimed. If the demand is there, builders were bound to build, also according to market principles.

We met our friend the other day and found him much changed. He complained of the pain of plummeting real estate prices. He had bought another apartment - using a bank loan - in Jamsil, also in southern Seoul. He said he was paying 2 million won in interest for loans on both of his apartments, and he asked us to buy the drinks instead because he was broke. One of our peers later said he had been itching to be sarcastic. “It isn’t just your house prices that went down. All Gangnam house prices tumbled. You just broke even.”

Our southern friend started to attack President Lee Myung-bak’s real estate policies. Last week, the president chaired a meeting on real estate prices. His conclusion was that the government will leave the real estate market as it is. The ruling party added that there would be no measures to firm up housing prices. My friend seethed at the government for doing nothing, even as ordinary people were suffering from falling home prices.

He even had ideas on how to revive the market. The government could create a housing fund to repurchase unsold apartments at their current market value. Prices are dirt cheap, and once the government starts creating demand through its purchases, prices would climb, compensating for its investment. Authorities also should ease financial regulations and make banks be more aggressive in extending loans. In addition, because the state-funded, low-priced housing supplies for the low-income bracket only depress the market, they should all be turned into rental units, he argued. The man had become completely anti-free market.

Of course, my friend isn’t entirely wrong. The fall in housing prices this year has become perilous in both magnitude and pace. The government estimates the fall to be an average rate of 0.6 percent. In reality, the downward spiral is much greater. The JoongAng Ilbo’s Sunday edition recently polled 207 realtors, and nearly 60 percent said the fall was over five percent. The Korea Housing Finance Corp. estimated that home prices in Gangnam plunged as much as 20 percent from their peak levels in 2008.

A sharp fall in home prices can lead to deflation, a risk we cannot afford. But it is hard to tell if the current fall in housing prices portends a deflationary risk. Most say nay for the time being. The price-to-income ratio of median home prices and household income still hovers 10 times higher than the levels in New York. Korean families can only afford to buy a home when they save all of their income for 10 years.

Stock prices have recovered to pre-financial crisis levels. And consumer prices are feared to climb further in the second half.

Under the circumstances, we need selective measures such as stimulating transactions between buyers and sellers while keeping prices at a stable level. Also, the government must rein in speculative forces while paving the way for ordinary people to buy new homes. Sadly, my friend is on the losing side. Sorry, my friend, but if you benefit, the authorities would have again erred in real estate policy.

*The writer is the business editor of the JoongAng Sunday.
Translation by the JoongAng Daily staff.


By Yi Jung-jae
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