How not to revive real estate

Kim Jong-soo

President Park Geun-hye and her government started their second year in office fully committed to the economy. They unveiled a three-year plan to reinvent the economy to give it a more innovative focus and televised a seven-hour forum on the subject of how to make headway in slashing government red tape. The goals have been set and the government’s zeal manifested. What’s needed now are concrete actions. President Park may well accomplish her specific numerical goals of attaining 4 percent in potential economic growth, a 70 percent overall employment rate and $40,000 in per capita income within her term. But there is a major stumbling block. The underlying economy is still rubbery and not solid. The economy is mostly about confidence. The president took charge very visibly and stood at the forefront of a campaign to revive it. Yet the economy remains dull and unimpressed.

The three-year plan to transform the economy is mostly designed for long-term output through structural reforms and changes. It does not include immediate stimulus. The keystones of the plan - reforms of public enterprises, evolution of the economy to a more innovative and creative model, and improvement of the domestic market through deregulations and liberalization - are structural changes that require time to generate positive effects. But if the economy continues to crawl along, her drive to push the structural reforms could lose steam. Resentment and complaints could build if people’s lives don’t pick up or show signs of picking up in the near term. People generally aren’t that patient. In order for structural reforms to succeed, they need help from some real economic improvement.

When you look at the data, the economy is on a rebound, albeit a gentle and slow one. The Business Sentiment Index surveyed by the Korean Chamber of Commerce and Industry, a barometer of business confidence in the coming months, hit a three-year high of 111 in the second quarter. A BSI above 100 means there are more companies that believe the coming quarter will be better than those who do not.

But that level of optimism is not shared by the general public. Retailers and restaurant owners forecast their revenue will be worse this year than last. Consumers are keeping their purses snapped shut. The consumer sentiment index that measures consumer attitudes while incorporating income levels and expectations about the general economy hovered below the 50 threshold for the 11th consecutive quarter since the first quarter of 2011. Consumers still lack confidence in the general economy and in their own economic prospects.

A structural slowdown from an old economic growth model is the fundamental cause of the depressed consumer sentiment. But for the common man, it is the prolonged slump in the real estate market that has damped the spending spirit. Houses remain the primary asset for Koreans. Because residence values sank below their purchase prices and plateaued for a long time - with some of them not sellable at all - households have little liquidity available. The total amount of household debt has reached the astronomical level of 1,000 trillion won ($93 billion) with mortgage-related liabilities taking up the lion’s share. Unless the real estate market pulls out its slump, consumer spending won’t improve as families are hard-up trying to pay their mortgages and credit card bills.

Retired people who have more than 80 percent of their assets invested in real estate cannot sell their properties because the market is so weak. The prolonged slump has made most of the population house poor. Because of the lethargy in real estate, realtors, moving companies and interior design companies are going out of business.

To reinvigorate domestic demand, it is imperative to revive the real estate market first and foremost.

The government could protest because real estate has been the one area it has been focusing on since the beginning of its term. It announced one stimuli measure after another since last year. It scrapped most real estate-related regulations even before deregulation went on the national agenda. In fact, the housing market showed signs of movement since the beginning of the year, especially in areas that are looking forward to redevelopment. People became more interested in home purchases as jeonse, or lump-sum deposit, prices shot up to near actual home values.

But the government’s latest measures to accelerate a transition of the market from jeonse to monthly rents splashed cold water on the delicate recovery. The government had ambitious designs to restructure the real estate market - to change the consumers’ view of homes to residences rather than a lifelong asset for ownership. The direction was right, but the timing was disastrous.

First, the government offered tax deductions to tenants to make them choose monthly rents over jeonse contracts. Then it came up with the idea of taxing landlords on monthly rents. For fairness, the same tax would go on landlords putting out apartments on two-year leases. The steps killed rent demand as well as the slight interest in home purchases for rental revenue. Incomes should be taxed, but why the government suddenly came up with the idea only raises suspicion of a veiled purpose to increase tax revenues.

The housing market is changing whether the government promotes it or not. Few expect houses to offer returns. Homes are sought for residences or post-retirement income from rents. The government should have accommodated policies according to the market’s needs. It should lower the cost of closing housing deals and give a grace period for taxation on rental income. Rent businesses and rent-exclusive complexes should be increased. Various financial products should be developed to facilitate liquidity from housing assets. What the market needs is an immediate remedy. An evolution would then come naturally.

JoongAng Ilbo, March 26, Page 28

*The author is an editorial writer of the JoongAng Ilbo.

By Kim Jong-soo