Posted : 2012-06-24 16:31
Updated : 2012-06-24 16:31

Property bubbles

Are there bubbles in Korea’s property prices?

It’s not easy to answer this question but a correct diagnosis of the property market is more important than ever before, given warnings that Korea might become another Spain or Japan struggling with the bursting of property bubbles.

Since the 2008 Lehman Brothers debacle, the country’s real estate market has been in the doldrums with property prices, especially those of apartments, falling and transactions almost at a standstill. Adverse effects from the property market slump are enormous as exemplified by the fact that the so-called house poor ― people who are mired in a trap after buying homes expensively with bank loans but being unable to sell them due to price decreases ― number more than 1.5 million.

The latest fiasco is the result of the collapse of the country’s ``apartment myth” that prices of apartments never decline. There are several reasons behind this phenomenon ― the aftershock of the global financial crisis, the prospect of the population decreasing and the explosive rise in the number of households with just one or two members. Simply put, an increasing number of people have misgivings that house prices won’t turn around for good and thus have little motivation to buy property.

Last week, the government announced a package of measures aimed at stimulating the dormant real estate market but a piecemeal approach won’t do. What is needed is the government’s strong determination not to allow the further fall of house prices in accordance with a paradigm shift in the local property market.

Some critics insist that home prices should decline further, alleging that prices picked up sharply before 2008 during the Roh Moo-hyun administration but this argument is dangerous, especially when we look at Spain and other debt-ridden European countries.

Real estate has a special meaning in Korea because nearly 80 percent of middle-class families have no valuable asset other than owning their home because of a less developed financial assets market. More than 400 trillion won of household loans are backed by real estate, raising fears that the deflation of property bubbles will make much of them non-performing, which could trigger a vicious cycle ― banks and other financial firms would go insolvent and then the economy as a whole could plunge into another crisis.

It is time for the government to come up with a comprehensive package of preemptive measures to boost property transactions and put the brakes on falling prices. Specifically, the government needs to relieve households from heavier property taxes when buying, registering and selling property.

The main opposition Democratic United Party (DUP) as well as the ruling Saenuri Party should cooperate with the government’s efforts to boost the real estate market.
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