[Viewpoint] The canary’s warningIn the old days, coal miners used to bring canaries with them when they entered a mine. Because canaries have sensitive respiratory systems, they would respond to the presence of carbon monoxide, alerting the miners to the toxic gas.
These days, the canaries are not in the coal mine but in the real estate market. Housing prices in the capital region have been dropping for the past four months, though the rise in rental prices has been moderate this year.
Housing prices are falling most quickly in redevelopment sites and “new town” areas. If housing prices were still on the decline despite low interest rates, there would be no solution to the problem. I am reminded of the warning by former President Roh Moo-hyun, who said, “If you take a loan and buy a house now, your family will be ruined.”
The real estate market is treading on thin ice. Potential buyers are not interested in anything but short-sale units at dirt-cheap prices.
In the last four decades, the real estate market was swayed by supply. But today, it’s a buyer’s market. And the most important factor here is the interest rate. There still is a risk that the interest rate will go up in order to stabilize prices.
The rapidly changing demographic structure is also disadvantageous for the real estate market. The deposit-based lease, which served as a uniquely Korean safety net against excessive housing loans, is disappearing.
Korea and China, in two rare cases, avoided seeing their real estate bubbles burst. Yet there are potential bombs everywhere. No one can be sure when external factors such as the European financial crisis will shock the system, and the hike in existing deposit-based leases has led to growing household debt. Retiring baby boomers are biding their time in order to sell the homes they own, but the younger generation in their 20s and 30s lack buying power due to unemployment and irregular employment.
There is no panacea for saving the real estate market right away. But first we need to focus on preventing the bubble from bursting. A sudden decline in the real estate market could lead to insolvency in household loans, which could ultimately cause financial instability and an economic crisis. And the victims of these issues have always been average, working-class citizens.
Nowadays, Seoul Mayor Park Won-soon is rushing to prepare an exit strategy from the “new town” project. He is pushing to add more small units in the redevelopment projects. He may have set the right direction and purpose, but his method and timing are ominous. It is hard to shake off the feeling that it is a short-sighted, ideological experiment.
His experiment has already caused a spasm in the redevelopment market, which is a litmus test for the entire real estate market. The low interest rate blew up the bubbles in Japan and the United States, but a sudden interest rate hike made the real estate market collapse immediately.
The real estate market problem should be addressed carefully. The most realistic prescription would be the measure used in 1992. The real estate market was stable for the first time from 1992 to 1997 after the first-generation of New Town developments was built, when disposable income increased rapidly. The bubbles that had gathered until the late 1980s were gradually resolved over time. By maintaining as much stability in the real estate market as possible, we can wait for disposable income to grow.
In Korean society, real estate is very political. Exactly one year ago, real estate decided the outcome of the by-election in Bundang, Gyeonggi. Voters were irritated by falling apartment prices and soaring lease deposits, and their choice was driven by fury. In the traditional ruling party stronghold, the opposition party’s Sohn Hak-kyu pulled off an overwhelming victory.
In this year’s legislative and presidential elections, the true showdown may be inspired by public sentiment on real estate. In addition to the usual motive to judge the Lee Myung-bak administration, the new variable of Mayor Park’s “new town” experiment has emerged. Let’s watch to see where the public’s fury is directed.
The canary has started to send warning signs in the real estate market. We are at a crucial juncture where a small mistake could lead to a critical failure. We need to learn from the fiascos in Japan and the United States. As we sense the canary’s warning, which way should we choose? As the old saying goes, a wise man learns after hearing, a smart man learns after seeing and a foolish man learns only after experiencing.
* The author is an editorial writer of the JoongAng Ilbo.
by Lee Chul-ho