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Here comes a bubble

Published: 21 Jun. 2016, 18:00

Various forms of irregularities and illegalities have sprouted from an overheated demand for new apartment supplies in popular neighborhoods. Unlicensed resale practices are rampant and traders are faking sales price to save taxes. Premiums on ownership rights are rising fast and speculative forces are flocking into inflated areas. Premium over the rights in a new apartment unit in Seoul averaged 26.45 million won ($22,823) in the first five months of this year. Record-low interest rates that generate zero yield from bank deposits has led to disproportionate concentration of funds in selective real estate properties.

Yet authorities are nowhere to be seen. The Ministry of Land, Infrastructure, and Transport in charge of real estate affairs merely has been repeating that it was closely watching the market. It fears any move to restrict the market could dampen the only activity in domestic demand amid sluggish demand elsewhere. It believes it could be blamed for worsening the local economy.

The government is originally at fault for stoking heat in new apartment sales. It lifted all possible regulations on new supplies in 2014. The qualification for the primary bidder was lessened to 12 months from 24 months since opening up an account. Collective loans taken out for installment payments in new apartments were exempted from credit regulations.

Now people are allowed to purchase scores of rights upon placing deposits. Ownership rights are not subject to taxes. One can earn millions or billions of won by reselling their rights to new offerings. The practices continue even as authorities threaten crackdown. They must extend the period for preventing re-bidding and reselling the rights.

Apartment builders are also fanning the fervor. New supplies have surged to 510,000 units last year from 330,000 in 2014. Another 470,000 units are in this year’s pipeline. The optimal annual supplies should be around 270,000. Unsold units remain empty when construction is finished. The housing sector warns of side effects from a glut from next year.

Constructors continue to beef up supplies because of easy bank loans to groups of tenants moving into new apartments. Authorities have exempted group loans while toughening mortgage-related bank lending regulation. Group loans that reached 5.2 trillion won in the first quarter accounted for more than half of total mortgage-backed loans of 9.6 trillion won in the period. Realtors are fanning speculation claiming that the government won’t likely clamp down on the new supply market to vitalize domestic demand. But illegalities must be reined in. Group loan regulations also should be toughened before the bubbles blow over.

JoongAng Ilbo, Jun. 21, Page 30