Slump is still with us

Park Deok-bae

The housing market in and around the capital, which remained stubbornly in the dumps despite recoveries in other parts of the country, finally began to show hopeful signs this year. From January to April, the index for apartment sales in the capital area edged up 0.7 percent. Unsold supplies were sharply reduced. The market finally appeared to be responding to a series of real estate measures hatched by the government. The legislature passed a handful of delayed deregulations and stimuli measures including low-interest public-backed mortgage loans, a permanent cut in the acquisition tax and eased restrictions on housing renovations and remodeling. The government also plans to lift dual income taxes on owners of multiple properties.

But that upbeat mood suddenly lost momentum. It is premature to say the revival has been reversed, but earlier enthusiasm is nevertheless drying up. The stimuli measures have lost their initial appeal. Follow-up measures of taxing rental incomes as part of a plan to encourage rentals over jeonse payments wiped out the effects of earlier stimuli and dampened demand in the housing market.

All the measures to revive the property market in the wake of the global financial crisis that began in 2008 have been fragmentary, focused on small and midsize housing units, and intermittent. Since the new conservative administration took office last year, it came up with a set of measures in April and August to stimulate demand and transactions, but they failed to generate any palpable or lasting effects. Transactions periodically picked up, but ended up only inflating rental prices and raising home insecurity for the working class and middle class. The government should think through the problem more thoroughly and draw up new real estate policies. The market has basically grown immune to an endless series of incoherent and contradictory measures. Market conditions have more impact on the market outlook than government policies anyway.

Frankly speaking, the fundamentals of supply and demand in the housing market remain unstable. Economic data points to improvement in demand thanks to a pickup in the global economy. But consumers feel no real improvement in their households’ budgets. Moreover, the sinking of the Sewol, which sent the entire nation into a state of shock, shame and guilt, has dashed cold water on domestic sentiment. Interest rates are heading higher due to rises in global interest rates and inflationary pressure. If the United States continues to wind down its expansionary monetary policy and moves to raise interest rates - as it is highly expected to do so next year - Korea won’t be able to keep interest rates at low levels. In view of our astronomical household debt levels, lenders could turn very conservative in offering new consumer loans. Although the rise in household debt has been slowing, loans with the nonbanking sector have increased and they could sour if their already high interest rates go even higher.

On the supply end, medium-size and large apartments in the capital are still in oversupply. With licensing for new construction on the rise even with high levels of unsold supplies, the glut in housing in the capital will likely continue. Licensing of new housing construction around the country was contained under 400,000 units following the financial crisis. But the number increased to more than 550,000 units between 2011 and 2012. Considering construction usually takes more than two years, the new stock could affect housing supplies for the next two to three years.

The housing market in the capital remains too fragile to say it is finally out of its slump. The traction is too weak at this point. Improvement in demand-supply fundamentals could be more conducive to stimulating the market than artificial stimuli.

To end the slump for good, consumers will have to be more confident about their incomes and the economy, and secure about investing in new homes. Jobs and incomes must increase. There must be more opportunities for the younger generation. Public policies should be focused on helping them find jobs in creative technology areas. At the same time, the government should prepare measures to prevent household debt from going bad. That would be a disaster for many sectors.

Translation by the Korea JoongAng Daily staff.

*The author is a research fellow at Hyundai Economic Research Institute.

By Park Deok-bae