[Editorial] Reviving the Real Estate Market

Fears over unsold apartments are rising with the phenomenon of newly built apartments with no advance buyers. To be specific, 12 of 60 apartment complexes nationwide that recently concluded advance subscription had no subscribers. Competition for subscription was also low in newly built towns in the Seoul metropolitan region and key residential areas. Though the low subscription rate is largely due to many builders “pushing” subscription since the real estate transfer tax exemption ends Feb. 11, another factor is stronger regulation on the debt-to-income ratio designed to prevent real estate speculation. The market has been glutted with apartments priced for quick sale since the ratio was expanded throughout the Seoul metropolitan area in September last year, followed by another regulation on financial institutions implemented in October.

In contrast, apartments for reconstruction in Seoul’s affluent Gangnam area have gained more popularity with expectations of accelerated development. Unit prices at certain complexes have recovered to levels before the debt-to-income ratio was set. With recovered demand for apartments by parents who wish to send their children to schools in the area and the general lack of supply, apartment leasing rates in Gangnam have rapidly risen. This has stoked fears over a recurrence of the devastating rental crisis of 2006.

Despite the aggravating bipolarization in the real estate market, the government continues to use a regulatory philosophy of one size fits all. As a result, people who need a house to live in suffer the most since the debt-to-income ratio makes it hard for the low income class to buy a house on credit. The regulation in effect only allows the rich with cash liquidity to invest in real estate. Excessive loans that could hurt the soundness of households and financial institutions should be restricted, but the government should not go as far as discouraging people against buying a house and freezing real estate sales per se.

36,000 newly built apartments in Gyeonggi Province and Incheon began welcoming new residents three months ago, but many apartment complexes are still half empty. This is because those who planned to move had yet to sell their existing homes as the debt-to-income ratio dampened sales in the real estate market. Therefore, the loan regulation has curbed home prices but also aggravated the housing problems of low income households. Lack of sales in the real estate market normally leads to contracted spending. Fortunately, consumption in November 2009 recovered with retail sales rising 12.2 percent from a year ago. To continue recovery, the real estate market must regain its vitality.

Financial and real estate authorities should come up with market measures that prevent speculation while boosting sales to strike a balance. Considering changes in market liquidity flow, policy variables such as the approval of the construction of a second Lotte World, and speculation sentiment, the government should implement targeted and refined measures for apartments for reconstruction in the Gangnam area, but also make sure it does not hurt chilly markets elsewhere. Economic ministers should sympathize with the pain of the low income class due to the frozen real estate market. They must do more than devise tax cuts for poorer people. One way to start is to listen to the voices of the low income class when designing real estate policies.