Is Subsidizing Builders the Right Answer?

Gov’t to Buy More Unsold Apartments to Revive Housing Market, but Critics Say Rude Awakening Is Near

By Kim Tong-hyung

Staff Reporter

The government is desperate to inject new life into the declining housing market, but experts are skeptical whether splurging taxpayer money to buy unsold homes will provide the needed jolt.

The increased spending on purchasing unsold homes was at the heart of a package of measures announced earlier this week intending to help people struggling with housing costs and the lack of demand.

Although policymakers claim the actions would be enough to stop house prices from skidding and construction companies from bleeding, some market watchers wonder whether the Lee Myung-bak government is pouring in Herculean effort just to delay the inevitable.

House prices have obviously been pushed up by speculative demand in the past decade, which had construction companies ruthlessly feeding the machine with new apartments year after year.

But as the country's household debt reaches over 850 trillion won (about $770 billion), of which 350 trillion won is real-estate related, according to the Bank of Korea (BOK), it's plausible to think that Koreans are close to maxing out their ability to continue the high-stakes gambling.

Combine this with the expected rise in interest rates, the injection of a slew of new homes to be finished in the coming years, and a population that continues to age quickly, the simple logic of supply and demand would predict that a rude awakening for the housing market is near.

Perhaps, Korea could predict its own future by taking a look at Japan, where house prices plummeted over the past three decades and major cities were left with more houses than purchasers. This has home owners competing for tenants while house buyers are rarely tempted to borrow money to purchase properties they can't otherwise afford.

``Since the government is reducing the inventory of unsold apartments through public resources, instead of letting the market take care of it, the recent measures won't do much other than buy a little more time for troubled construction companies and delay the industry's restructuring,'' said Seon Dae-in, a researcher from the KS Economic Research Institute.

``The core of the country's economic problems lies in the increasing amount of household debt, not in the bankruptcies of financially unhealthy construction companies and the bursting of the bubble is inevitable as the housing market has just entered a phase of surplus in supplies. The country's population of people in their 30s and 40s already peaked in 2006, which would mean that the number of people who are financially capable of buying homes continues to decrease.''

Unsold Apartments

According to the Ministry of Land, Transport and Maritime Affairs, a total of 3 trillion won (about $2.7 billion) will be spent on purchasing 20,000 unsold presale apartment units through the Korea Housing Guarantee (KHGC), on the condition of reselling them to builders or individuals after a certain period.

The money will be first spent on presale units in regional areas, where the housing markets have deteriorated more severely than in Seoul and the metropolitan area.

Stronger financial support was also promised to jump start the sales of unsold finished homes, mostly by facilitating real estate investment funds (REITs). The Korea Land and Housing Corporation (LH) will spend 1 trillion won to buy the unsold new apartments to let to tenants under its public housing program.

The debt-to-income (DTI) restrictions, which handcuff insurers and mutual savings firms from lending money to homebuyers beyond a certain limit, will also be relaxed to those who purchase the existing properties of would-be house buyers intending to relocate to new homes.

The housing market has been slowing considerably since 2008, and the difficulties people are experiencing in buying and selling homes are leading to devastating effects on both the markets for new homes and rentals, with the supply of mortgages, sales and house prices skidding quickly.

The number of unsold homes remains at an alarmingly high level at around 116,000 units, but the government believes that the new measures will be able to reduce the inventory to 75,000 units by the end of the year.

However, critics argue that the new government measures, even should they achieve their desired goals, would have a marginal effect. Many observers believe that the government statistics of 116,000 unsold homes is generous, and that the real number likely reaches over 200,000.

Managing to take 40,000 units off the inventory hardly changes the whole picture, and it remains uncertain whether or not and when the government would be able to resell the homes to construction companies or future house buyers. The KHGC, which was established in 1992 after the country introduced the current preconstruction sales system, would be reluctant to shoulder too much of a financial burden when the government is pushing for its privatization.

LH already has more than 100 trillion won in debt, and it would be hard to stretch it thinner to further feed the government's public housing pipeline.

``The current measures are just recycled old ideas that hardly make a difference. We have to figure out a way to make it easier for home buyers to purchase the currently unsold homes, but the present market situation doesn't inspire much confidence on that part,'' said Lee Chang-geun, a researcher from Hyundai Securities.