[Editorial] Soft Landing of the Housing Market

The government has managed to quell fears over a financial crisis for the time being, but a new challenge has emerged: a slowdown in the real economy. To revive the real economy, it has introduced measures to boost the housing and construction markets by slashing regulations on redevelopment and reconstruction, and to encourage capital flow by advancing the construction schedule for social overhead capital projects in rural areas.

A comprehensive set of measures announced Monday seeks to expand the fiscal plan and reduce taxes at the same time, with the goal of pulling the real economy out of trouble. These will cost 14 trillion won (10.7 billion U.S. dollars), 10 trillion won (7.9 billion dollars) of which is for extra budget, three trillion won (2.3 billion dollars) for further tax cuts and one trillion (792 million dollars) for additional investment by state-owned enterprises. Together with financial support promised two weeks ago to construction companies worth nine trillion won (7.1 billion dollars) and existing tax reduction plans worth 10 trillion won, the government is projected to spend 33 trillion won (26.1 billion dollars) on pump-priming measures this year alone. This latest set of measures requires a huge sum of money that accounts for 3.7 percent of GDP, well above the average of advanced economies of two to three percent.

The government must keep in mind that massive spending will prove worthwhile in boosting the real economy only when efficiently distributed. If the money funds pork barrel projects as some have warned and public funds are poured into areas without urgency, the plan will be undermined. At the same time, the finance and construction sectors, which will receive state support, must undergo intensive internal restructuring to prevent moral hazard.

A hard landing of the housing market could send a huge shockwave throughout the real economy and the people’s livelihood. Sales have been plummeting for a long time and the glut of unsold houses has continuously pushed down prices. The government, however, failed to promptly respond to such problems to the disappointment of many households. Measures for unsold houses came after 251 construction companies went bankrupt by the end of September. Talk about bad timing. If construction companies, thrifts and banks become insolvent all at the same time, Korea could see its own version of a subprime mortgage crisis. This is why the government must take more aggressive action in the housing market.

Changes in regulations and market liquidity can send the housing market on a rollercoaster ride. Therefore the government must prevent a dangerous housing bubble from forming due to sudden deregulation and liquidity injection.

President Lee Myung-bak promised in a public address to prevent bankruptcy of well-performing small companies, alleviate burden on the working class, and create jobs for the disadvantaged. He also needs to meet the challenge of supporting exporters and strengthening the foreign exchange market to ensure that the current account balance, which posted a surplus last month, stays in the black well beyond October.