Averting a housing crisis
We should be relieved that the alarm has sounded about an impending housing crisis in 2017-18. We should all be better prepared. In two years, home values will likely depreciate, and trade could come to a full stop.
The forecast is not a bluff. Licensing and new housing supply this year were the largest ever. When the new supply is ready to be inhabited in two years’ time, supply will overwhelm demand. By that time, Korea has been warned that it is facing a demographic cliff due to a thinning working population with the ability to spend and buy new homes.
Society will also be unstable and policies unreliable from the preoccupation with the presidential campaign and election in December. Any shock from overseas could deal a heavy or even fatal blow to the vulnerable local economy.
A crisis can be avoided when we know of the possibility. People are better prepared if they are aware of the bumps ahead. A crisis is inevitable if we leave things unattended. But we still have time. We can minimize the damage from a forewarned typhoon if we reinforce the fortress.
The government should lead the way. Its policies of stimulating domestic demand through eased lending regulations and interest rates have worked, but they could now backfire. Debt-backed activity in the housing market has begun to cause concern.
The average gain of 20 percent in new apartment prices over the last two years spells the word “bubble.” Even construction companies are worried about the bubble bursting in two years. But they want to enjoy the boom until it lasts. It was the government that started the binge in the first place. If it pulls out now, it could end up making society pay a dear price. The Financial Services Commission must proceed with the plan to overhaul the home-related lending practice to have borrowers pay the principal on their loan with interest rates. It should not backtrack in its plan to implement the rule because of warnings that the market could suddenly cool under the new lending regulation.
But a recovery in housing prices through inflated demand by lending out money to people who can only afford to pay interest on their housing loans is a recipe for disaster. A sand castle can crumble easily upon a wave.
The Ministry of Land, Infrastructure and Transport should advise construction companies to control their supply. It must send a clear message to the industry that there won’t be any bailouts if companies run into trouble after their supply fails to draw enough tenants.
The Bank of Korea also has an important role. It must not heedlessly follow its U.S. counterpart when it starts raising its policy interest rate. The Korean benchmark interest rate of 1.5 percent still has room against the U.S. rate of near-zero percent. The central bank must have the flexibility to cut the key rate further if a housing crisis spills over to the broader financial market. Consumers should also have a different attitude. There is no longer any hope of earning big money through housing investments. People must instead choose homes they can live in for a long time. They must keep the lending ratio to 40 percent of home value.
There is an easy way to avoid major losses in home investment. There is the so-called 5 percent rule in the U.S. market. Some Americans consider whether they can get a 5 percent return before purchasing a house.
There must be at least a 3 percent return from a home purchase, excluding a 1 percent tax and another 1 percent in depreciation cost. When purchasing a home worth 500 million won ($429,000), one must be assured that it will generate monthly rent of at least 2 million won.
In Korea’s case, a 4 percent rule would be more practical because tax and depreciation is less than in the United States. For a 500 million won home, annual income of 2 million won or monthly income of 1.65 million won would be reasonable. Many homes outside the capital do not generate rent income yield of even 4 percent.
JoongAng Ilbo, Dec. 3, Page 32
by The author is head of the JoongAng Sisa Media.
by Kim Kwang-ki