Signs of Bubbles

Time to Take Preemptive Action Against Speculation

South Korea is forecast to become one of the world's fastest-recovering economies next year. Economic players are now elated at a recent government prediction that the nation's gross domestic product (GDP) will rebound by 4 percent in 2010, after shrinking 1.5 percent this year. Policymakers usually tend to paint a rosier picture as far as the economy is concerned. Thus, businesspeople and consumers often play down the government's overly optimistic economic outlook, looking for more realistic projections from independent think tanks or international institutions.

In late June, the Organization for Economic Cooperation and Development (OECD) said in a report that the South Korean economy would grow 3.5 percent next year after suffering a 2.2-percent contraction in 2009. In addition, many economists at home and abroad share the upbeat prospect, raising public anticipation for a full-fledged recovery. It is safe to say that the Lee Myung-bak administration's massive fiscal stimulus packages and tax cuts along with the central bank's monetary easing have begun to work to help the economy ride out the unprecedented global economic crisis.

But it is still too early to predict that the country will completely overcome the world's worst crisis since the Great Depression in a short period. There still exist many economic and financial uncertainties, not only in Korea but around the world, that may dampen hopes for a quick recovery. Therefore, it would be more prudent to have a guarded optimism as the nation will have to grapple with side effects of the large-scale stimulus and the oversupply of money. These feared side effects might include hyperinflation and a soaring budget deficit.

What's more worrisome right now is the growing signs of property speculation. There is short-term excess liquidity worth more than 800 trillion won ($630 billion) which could flow into the property market. Financial data show that individual investors are cashing out from the local stock exchange in an apparent move to buy homes for speculative purposes. The sum of mortgages extended by commercial banks increased by 18 trillion won in the first six months of this year, meaning that each month saw a rise of an average 3 trillion won in new loans.

As a result, the number of apartment transactions in Seoul alone exceeded the 10,000 mark in May, compared with 9,911 in April, 7,833 in March, 6,361 in February and 4,495 in January. Apartment prices have also shown a rapid rebound in southern Seoul and some metropolitan areas, blowing more air into property bubbles. This speculative mood cannot be ignored because the bubbles will do more harm than good, hampering the nation's efforts for sustainable economic growth.

It is somewhat fortunate that the government has begun to recognize these speculative signs. Strategy and Finance Minister Yoon Jeung-hyun said June 25 that he would take necessary measures against speculation after closely monitoring the property market. Chin Dong-soo, chairman of the Financial Services Commission, also said Friday that regulators will work out steps to make it harder for home owners or home buyers to get mortgages to nip the speculative move in the bud.

We hope the authorities will make their utmost efforts to take preemptive action to avoid property bubbles and minimize other ill effects of the fiscal and monetary expansion for economic stimulus. The country should no longer be haunted by the specter of the recurrent social evil ― property speculation.