Don’t ignore the bubbles

The overheating in the real estate market is getting out of control. The epicenter is the redevelopment apartment projects in southern Seoul. The application rate for a redeveloped apartment complex in Shinbanpo, Seocheo District, in January had been 37.8 to one. Apartment costs were at 40 million won ($36,049) per 3.3 square-meters (35.5 square-feet), or one pyeong. But that was just the beginning.

The offering of 28 homes in a redeveloped apartment building in the same neighborhood last week drew as many as 8,585 applicants. For an apartment of the same cost, 40 million won per each 3.3 square meters, the rate had increased to 306 to one. The redeveloped apartment offerings have turned into a speculative gambling range because the resale of the ownership after six months can reap millions of won in profit.

The fervor over redevelopment offerings has sent overall prices of mid and small-sized apartments in southern Seoul skyrocketing. An apartment of 59 square meters in Banpo, Seocheo District, can fetch over 1 billion won.

It is a dangerous sign for the real estate market to be overheating while the rest of the economy remains in the dump. Because all available capital goes into homes, individuals cannot afford to spend. The slump in domestic demand will prolong. If the bubbles in the real estate market suddenly burst, over 1,300 trillion won worth of household debt could trigger a financial catastrophe.

Yet the government remains laid-back saying it is too early to take any action. It was the government and its rash set of deregulations that had heated the market in the first place. The government eased regulations on mortgage-backed loans and scrapped the limits on bids for new apartments. Big money that had nowhere to go due to a low interest environment flooded into the real estate market.

The government must clamp on the market to curb reckless investment in redevelopment properties. It must strengthen the resale term which is permissible after six months to after the apartment is completed. Punitive actions also should toughen on registration and document fraud. It must act fast because the more it drags its feet, the bigger the bubble will grow.

JoongAng Ilbo, Oct. 10, Page 30