[Editorial] Real Estate Policies

According to the Construction Association of Korea, the total value of construction contracts in March stood at 7.3 trillion won, a 29 percent decrease year on year. It predicts the private construction market would continue on a downward path in the latter half of this year because the government is considering writing two real estate-related laws into the system. If enacted, the laws will require construction companies to pay a certain percentage of the profits from their redevelopment projects in taxes, and bear a certain share of the expenses for infrastructure expansion needed over the course of redevelopment. Despite the slowdown in the overall market, housing prices in Gangnam, Seoul, in March rose at the fastest pace in the country. This indicates that the government failed to curb the soaring housing prices in Gangnam and only ended up contributing to the sluggish construction market.

The most heavily affected by the sluggishness are those in the working class. By its nature, the construction industry is a major employer of temporary workers who are hired on a daily basis, and almost all of them live from hand to mouth. While the semiconductor industry creates 4,469 jobs for every one trillion won invested, construction generates 23,602 jobs for the same financial input. The comparison leads to the conclusion that construction jobs are very business cycle-sensitive. Since the government’s package of real estate policies on August 31 last year has resulted in reduced activity in the construction industry, the number of successful job seekers in the industry went down as well. The number was down to 1,806,000 as of March, this year, from 1,931,000 in June 2005.

Still worse, the economic slowdown is accelerating. Due to high oil prices and the plummeting won-dollar exchange rate, the current account has turned negative. Businesses are reluctant to make facility investments. Korea has been running current account deficits for two consecutive months with a deficit of $370 million in March. A highly likely economic slowdown in the U.S. in the second half of this year is expected to affect Korea’s current account for the worse. Accordingly, some private research institutes revised down Korea’s economic growth estimate for the latter half of the year from 4.2 percent to 4.0 percent. Given the gloomy outlook, a contraction in the construction industry will put the Korean economy on a downward spiral.

Meanwhile, the list of 9,428 bidders for small- to mid-sized apartments in Pangyo was announced two days ago. Each of the 9.000-plus bidders will gain a premium of as much as 300 million won. But the gains have not helped much to stabilize the housing prices in Gangnam, one of the objectives of the development of the Pangyo area, because suppliers failed to satisfy a wide range of demands. The lack of diversity on the supply side lies behind why the government’s real estate policies are often viewed as a series of unfair attacks on Gangnam and why the policies have turned out to be ineffective. The government needs to introduce more market-friendly policies that are more favorable to suppliers. For instance, the authorities can allow redevelopment projects in Gangnam on a reasonable basis. Reasonably market-friendly policies will help revive the construction industry and provide reliable real estate policies in the mid-to long-term, in the interests of the working class.