Real estate mattersHousehold debt is expected to reach 1,300 trillion won ($1.2 trillion) by the end of the year. There is worrying talk about the colossal debt exploding in a catastrophy and taking a toll on real estate prices if the United States begins pulling in some of the easy liquidity it unleashed through quantitative easing as a result of the 2007-2008 global financial crisis.
Pressured by repeated danger warnings, the government this week will announce comprehensive measures to curb household debt including toughened terms for resale and regulations for banks extending group loans to consumers that obtained rights to apartments planned for construction.
Action is needed, but a gentle touch must be taken so as not to add confusion to the real estate market. Most importantly, authorities must draw up measures strictly based on the principle of supply-and-demand. There will always be demand for housing in popular neighborhoods in southern Seoul, the beach-view Haeundae district in Busan and Suseong district in Daegu.
Residences in Korea are not regarded merely as residential space, but as goods with value and one of the biggest investments a family will make. With per capita income at $30,000, people seek a certain living standard and consider traffic, education infrastructure and the environment in choosing homes. Korea is taking the same path Japan traversed a decade or two ago.
Japan’s real estate market has gone downhill since its bubble burst in the 1990s, but a close study shows a different phenomenon. Demand for better housing environments and new homes did not go away. New supplies in popular neighborhoods were immediately filled.
Demand for newer and better homes coupled with a low birth rate and aging society left many homes empty. Low birth rates have depressed overall housing demand. Homes in rural areas were left vacant when their aged occupants passed away. As people moved to new homes, older ones were abandoned. Abandoned homes reached over 9 million. Korea will see a similar phenomenon. People will continue to seek better environments. The number of abandoned homes will continue to grow.
The real estate market, therefore, needs to be strictly controlled. Supply must be enhanced in highly-sought areas through redevelopment. Consumer demand must be satisfied in order to ensure stability in the market.
Supply should be cut down in areas where demand is low. Authorities must first improve the environment through redevelopment to transform it into an inviting and appealing place to live. Then there is the need to worry about abandoned homes. Authorities must start with a plan that ensures Korea does not end up with deserted houses like Japan. The government could buy them to remodel and later rent them out. When homes are left deserted, they add burden to the supply and can degenerate into slums.
Most importantly, the cycle in the real estate market needs to be moderated. The government must stop volatility in policies. Throwing cold waters on signs of overheating and then bringing the market to a boiling point confuses consumers. Japan’s real estate market was killed beyond repair because of fickle policies. Authorities must be precise. Stifling demand in upscale and desired environments will only bring about side effects. It is best to accurately remove the causes of overheating.
Loosening of regulations on mortgages to stimulate the real estate market should be incrementally reversed. Ultimately, loans should be strictly based on the affordability, or debt paying ability, of the borrower. Loans that have exceeded 70 million won per household must be capped.
Speculative activities also need to be more thoroughly regulated. Illicit deals understating the sales price to cheat on taxes owed must be reined in. Short-term resale and unregistered sale for profit also must be restricted. Through such fine-tuning of policy, the real estate market can be normalized and led by real demand: that is, people seeking better living conditions.
Wealth inheritance through real estate also must be clamped down on. Authorities must slap heavy levies on parents’ purchasing expansive homes in the name of their offspring or renting them to their children or grandchildren cheaply. The housing market can right itself and thrive modestly through these practical actions.
JoongAng Ilbo, August 22, Page 28
*The author is an editorial writer of the JoongAng Ilbo.