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`Rising Housing Prices Could Threaten Economy`

Posted September. 19, 2009 11:28,   


A confidential report suggested by the Bank of Korea to the Strategy and Finance Committee yesterday said a surge in housing prices in the Seoul metropolitan area threatens the economy.

In a financial stabilization report exclusively obtained by The Dong-A Ilbo, the bank also recommended an interest rate increase.

Though the debt-to-income regulation was expanded across the capital region Sept. 7, the bank said it cannot effectively put a lid on surging housing prices.

The report said the domestic economic system has regained stability since the bankruptcy of Lehman Brothers last year, but snowballing household debt and surging housing prices could raise anxiety in the market.

“Real housing prices, reflecting housing prices and cost of living in comparison with incomes in the Seoul metropolitan area, surpass those of the United States and United Kingdom, whose housing market bubbles have already burst,” it said. “Unlike other major economies whose housing markets have collapsed, Korea’s housing market underwent a short-term fine adjustment only and housing prices began rising in the Seoul metropolitan area in April. That’s the problem.”

On the southern Seoul districts of Gangnam, Seocho and Songpa, floating funds, investment by ethnic Koreans overseas, and land compensation resulting from several development projects have continuously flowed into the districts, causing housing prices to soar.

The report urged a preemptive government approach via efficient monetary policies and regulations in the financial sector and taxation to control a surge in household loans and prevent high expectations for a rise in housing prices.

This analysis goes against the argument of the Strategy and Finance Ministry that it is too early for an exit strategy this year, including an interest rate increase.

The bank releases the report every April and October after consulting with the Monetary Policy Committee. This time, however, it suggested a tentative report without consultation at the request of the National Assembly.

surono@donga.com jaeyuna@donga.com