Cooling the marketMinister of Land, Infrastructure and Transport Kang Ho-in is not a passionate person, and neither is his policy on housing.
In his inauguration speech in November, he said the housing market must be neither “too hot nor cold.” Buoyant demand for new apartment offerings raised worries about an oversupply two to three years on and a real estate bubble burst. Concentrated demand and a spike in the value of neighborhoods waiting to be redeveloped in southern Seoul would deepen wealth polarization. The average value of an apartment in southern Seoul jumped to five times the value of the same-size unit in the northern part of the capital, widening from fourfold.
Kang sat on his hands, making no intervention in the market. Ministry officials claimed their boss was in a bind on housing policy.
Under the former deputy prime minister for the economy, Choi Kyung-hwan, the centerpiece of his agenda was to revive the economy through real estate market stimulus, one official said. To stimulate the real estate market, property prices in southern Seoul must go up first, which usually has a trickle-down effect in other parts of Seoul and later also the rest of the nation.
Authorities lifted all remaining caps on apartment redevelopments and did not interfere in the flood of money going into the sector.
Choi, a former ruling party floor leader who had the full confidence of the president, wielded enormous power. Regardless of what he personally believed, Kang of the Land Ministry could hardly interrupt or interfere with Choi’s policy.
Half a year has passed since. What was feared is becoming a reality. Values for apartments under redevelopment shot up 10 million won ($8,600) overnight. The apartment value in one neighborhood gained as much as 300 million won in just one month. The new apartment market has turned into a pandemonium of speculators.
The ministry came up with belated action earlier this week. Loans for down payments for a residential unit costing over 900 million won will be restricted. But those actions can hardly stop funds estimated at 1,000 trillion won from flooding into the lucrative market.
Lump-sum cash chasing high returns is called smart money. They build up when interest rates are low. Its kind doubled from 540 trillion won worth during the financial crisis in 2008. It is not actually smart, but anxious money. The investor is worried about the volatile stock market and of low interest rates offered by banks.
Apartments being redeveloped in safe and posh southern Seoul neighborhoods make good targets for that kind of money. The area has a reputation for unwavering values. To teach such blind and easy capital a lesson, the myth about southern Seoul real estate must either be broken or the money needs to be channeled to more productive places.
But this poses another conundrum for the minister in charge of housing policy. Shattering the myth about southern Seoul properties could shake the real estate market, and Kang would have to take the fall for further denting the feeble economy.
Aged apartments in southern Seoul are a rare species. The more authorities regulate, the greater their value becomes. If redevelopment is fully banned like under President Roh Moo-hyun, the fever could stop. But there are downside risks. Other property values could go up in a balloon effect. The hot money would flock to office and commercial buildings. If they are stopped, the entire real estate market would freeze. That choice could be devastating at a time when the economy is faced with more uncertainties following the British vote to leave the European Union.
At the same time, encouraging investment options that can aid the economy is beyond the jurisdiction of the Land Ministry. Various financial products for alternative investments and new ventures must be offered. Such policies become lost either in the Financial Services Commission and the Finance Ministry or the legislature.
The land minister, however, must take charge one way or the other. He must persuade Deputy Prime Minster for the Economy Yoo Il-ho that speculation and overheating in southern Seoul must be curbed. He also needs to persuade the legislature.
Kang solved the conundrum over a new airport project in the south amid simmering conflict between North and South Gyeongsang in a fight to host the new airport by choosing a third option of renovating the existing airport in Busan. It was truly a smart choice. He should use more of his wisdom for a decisive action to cool down the overheated real estate market in southern Seoul.
JoongAng Ilbo, June 30, Page 30
*The author is an editorial writer for the JoongAng Ilbo.