Private Banking Centers Weigh In on Impending Real Estate Measures

Wait and See for the Time Being-

Private Banking (PB) centers of banks in Gangnam area, Seoul were quiet on August 31, as there was no news except for what was already known.

PB centers estimate that there will be no rapid change in the real estate market as well.

That is because heavy capital gains taxes on households that own two homes will not be imposed until 2007 after a grace period and because the strengthening of the possession tax will not be applied to real estate sold before June 1 next year, the scheduled date of the imposition of the tax.

In particular, with high expectations that home prices will drop further, predictions are that transactions will not occur for the time being.

Hahm Hyung-kil, a team leader of Hana Bank, said, “Would-be home sellers already sold their homes,” adding, “There was a large amount of funds waiting for investment in real estate. But now there is an increasing number of customers who want to wait for a year or two.”

Some PB centers recently received several calls a day which inquired of investment in overseas real estate. This means that investors who think that profits from domestic real estate market will be reduced are becoming interested in the U.S. and China.

Real Estate Market Will Be Stable in the Short Term-

There is no denial that housing prices will be stabilized in a lower price range until the end of next year when the tax burden will steadily bring homes to sell to the market.

In particular, chances are high that two-home owners will put a large number of homes on the market by the end of next year, a grace period for the heavy capital gains tax.

Ahn Myung-sook, a team leader of the PB division of Woori Bank, predicted, “There is a slim chance at least for a year that real estate prices will recover or rebound,” adding, “Prices will drop by a big margin until September. Afterwards, with transactions discontinuing, price will remain stabilized at a lower level.”

Home price drops are expected to take place in non-city centers including the Gangbuk area, rather than in Gangnam area, the epicenter of the overheated real estate market.

That is because multi-home owners are expected to sell less profitable apartments, including small apartments, in the Gangbuk area, rather than apartments in the Gangnam area.

Indeed, price declines in small apartments in the Gangbuk area were prominent during the second half of last year in the run-up to the imposition of heavy capital gains taxes on households that own three homes.

What to Do?-

Goh Sun-young, the manager of Citibank Korea, said, “To reduce tax burden, one should only retain homes with high investment value, selling or donating the rest. But there is no need to hurry,” adding, “It is time to reconsider a long-term asset portfolio.”

Goh also recommended that investors turn their attention to the stock market as the attraction of the real estate market as an investment destination has weakened to a degree.

Demand for the stock market is stable, as indirect investment, such as installment funds, is increasing and the introduction of corporate pension and variable insurance are expected at the end of this year.

There is a prevailing prediction that the asset structure of Korea will change, like that of advanced countries, from real assets to capital assets, with focus on products with high investment value from safe products.

However, some say that real estate prices will rise again after a short-term adjustment.

Suk-Min Hong Jin-Young Hwang smhong@donga.com buddy@donga.com