A broken clock is right twice a day
The author is a columnist of the JoongAng Ilbo.
Land Minister Kang Ho-in under the previous Park Geun-hye government was often criticized for being “too lukewarm” in real estate policy. When the new apartment offering market was overheated during his early days in office, he came under pressure to mount cooling-off measures. Kang responded that in the housing market the Goldilocks principle of being “neither too hot nor too cold” should be applied.
Kang remain stoic to public and media sentiment. He claimed that small regulation will have no effect and too strong of one could have a chilling effect. Today, the real estate market has become entirely the opposite. The supply is never enough, and prices are sky-high. Kang could have been right in his phlegmatic stance on our real estate market.
Current Land Minister Kim Hyun-mee, who has headed the ministry since President Moon Jae-in took office three years ago, has been on a roll. She churned out one regulation after another to push the housing market to the extremes. The politician-turned-minister not only had the full backing of the president and ruling Democratic Party (DP) but has also been overly enthusiastic.
She did not mind the consequences of her tough words. Upon inauguration in June 2017, she vowed to prosecute a “war on speculation.” She urged people to dispose of any extra homes they did not live in. Those who paid heed to her words would be kicking themselves for believing in her. She threatened to give them “until June” and asked them why they desired to live in Gangnam, which is in southern Seoul, so much.
She claimed that home prices in Seoul gained 11 percent even when a civic group on economy released shocking data showing a whopping 52 percent jump.
She assured us that home supply was sufficient. She tailored data to back her reasoning, even as the market went the opposite way of her wishes. The market responded in the opposite way, as housing prices always soared after she came up with new measures.
Last week, Kim said it was disheartening to see people in their 30s “selling even their soul to squeeze out money” to buy homes. She advised them to turn their attention to the offerings in the new suburban developments. She sounded frustrated to see people buying homes at sky-high prices when she believed they were bound to come down.
Her comments drew angry reactions from people for being insensitive with “crocodile tears” and “clueless” toward the harsh reality. The minimum score to win a subscription for an apartment offering in Seoul last month was 60.6 points on average. People in their 30s could get 57 points at best due to having a shorter period without a home.
Kim’s advice to go after new pre-construction apartment offerings can be ignored. But her plea against people in their 30s for spending so much to buy a home calls for some deliberation. The July 10 measures had been completely ruinous. They could not have come from a sensible government.
The package was designed to wreck the housing market. The signs are already there. A tax accountant said he had received hundreds of phone calls from multi homeowners since the July 10 measures. Most of them asked about selling their homes before heavy tax bills arrive. Calls had rushed in after the Aug. 2, 2017 measure, which included a surcharge on capital gains. “But this time around, homeowners are more desperate,“ he said.
There is a limit on how high a price can go. If prices fall, the housing market can come to a standstill when it is coupled with tax bombardment. Another accountant said there is no incentive for an owner of more than one home to buy another. “Let’s assume that a home value goes up 1 billion won ($841,540) in three years. When you take into account all the taxes — 72 percent on capital gains, 12 percent on purchase and minimum 6.6 percent on ownership — which amounts to more than 90 percent — the investment would be a money-loser. Housing prices eventually would have to come down,” he said.
Money chases profit. If there is no profit, there will be no demand. As property tax increases from next year, the financial cost won’t be that great for the time being, given the record-low lending rates. Multiple homeowners will somehow hang tough for a couple of years. They will likely wait out until the Seoul mayoral by-election next year and the presidential election in the following year.
But the supermajority DP will likely push ahead with extreme measures. If the market goes short, housing prices could enter a downward spiral. The fall will start from June next year when the capital gains tax kicks in, and accelerate by the end of the year when the full property tax bill arrives. The downfall could last until the presidential election in May 2022. The market should put on its seat belts as the roller coaster is headed downward.
Even a broken clock can be right twice a day. Kim could turn out to be right at least about a housing market crash.