By John Burton

While the property markets in Hong Kong and Singapore are reaching eye-watering heights, Seoul has the opposite problem: housing prices have stagnated over the last two years, according to Kookmin Bank’s Seoul Price Index.

So what happened to the property boom of 10 years ago, when prices were spiraling upward at an annual rate of 25 percent? Or five years ago, when house inflation in the capital was powering along at a 20 percent per annum rate after a sharp drop in the interim?

The short answer is government intervention. In response to public complaints about “unaffordable” housing, the populist government of Roh Moo-hyun sought to tame the beast by introducing tough regulatory measures, such as applying a 50 percent loan-to-value ratio on mortgages from banks. It was mission accomplished ― at least when it came to the Seoul area (national property prices overall continue to rise by around 6 percent per year).

But the measures have had several unintended consequences. One is that people who did want to buy homes were forced to take on bigger amounts of non-mortgage financing at higher interest rates, contributing to Korea’s very high household debt levels.

In addition, rents have skyrocketed by as much as 20 percent annually in the last few years since many people can’t meet the strict mortgage standards, but still need a place to live.

This is the background to the latest attempt this month by the administration of builder-turned-President Lee Myung-bak to get the property market off the floor and standing once again. The main plank in the stimulus measure was to ease the particularly tight restrictions on the buying or selling of housing in Seoul’s most expensive real estate districts of Seocho, Songpa and Gangnam, which also happen to be the strongest electoral strongholds in the capital for the ruling Saenuri Party. The administration of Roh Moo-hyun in 2003 labeled these southern Seoul districts as “areas of real estate speculation” and believed they were the main engines fueling the property price bubble.

A revived property market would encourage developers to start breaking ground for new housing. The government’s retreat from micro-managing the property market would provide a welcome boost to the struggling construction sector, whose woes have contributed to financial stress. The current crisis in the mutual savings bank sector is partly due to the inability of the banks to recover loans made to small construction contractors that went bankrupt as a result of the building slump in the last few years.

One reason for the construction sector’s problems is that Korea already has a pretty advanced infrastructure and arguably needs to build a lot less going forward. The country’s fixed investment has been on a steady decline since the excesses that predated the 1997 financial crisis. Construction’s share of gross domestic product has fallen to around 15 percent and is likely to shrink further in coming years.

So will the government’s efforts to kick start the housing market succeed in rescuing the construction industry? There is still room for potential growth when it comes to residential construction, which now accounts for only 3 percent of GDP compared to more than 5 percent in 2003 when the Roh Moo-hyun administration began its crackdown on property speculation.

But even if the government undertakes efforts to upgrade Korea’s functional but unspectacular housing stock, the local property market still faces several challenges.

One is the lack of buying power if real wage growth remains stagnant while Korean households struggle with one of the highest personal debt burdens among the world’s advanced economies. Much of local household debt is not classified as property-related, unlike in many other countries. The proportion of mortgage loans in Korea is abnormally low. This suggests that many Korean families will have difficulties taking out bigger mortgages to buy homes until they resolve other debt issues.

The fact though that some of that debt is expensive non-mortgage financing related to housing is actually an argument to eliminate the debt-to-income ratio and loan-to-value ratio lending guidelines since their abolition would improve access to cheaper mortgages. It also would reduce pressure on homeowners to sell their property to pay off debts if they could refinance the housing loans at lower interest rates. The government has been reluctant to end the lending limits in the mistaken belief that it would only add to soaring household debt.

Measures to stimulate demand are needed if Korea is to tackle the long-term structural problems that threaten to depress the property market. The country’s rapidly aging population is set to weaken future demand, particularly since younger workers will have less money to buy homes as they face higher tax bills to finance public services for the elderly. The government should start focusing less on housing prices and more on ensuring stable supply and demand in the property market.

John Burton, a former Korea correspondent for the Financial Times, is now a Seoul-based independent journalist and media consultant.