It is a typical pattern for administrations to boost the real-estate market when the economy is in a slump. President Lee Myung-bak’s administration is no different.
The policy package that the Lee administration unveiled on Thursday was intended as a shot in the arm for the housing market in the doldrums. The measure was taken at a time when the administration finds it extremely difficult to attain its modest growth target for this year ― 3.5 percent.
Most notable among the policies was to free Seoul’s three pricey residential districts south of the Han River from the yoke of being designated as areas prone to property speculation.
The change in policy permits a person buying a home in the districts to borrow more money from a bank, as the debt-to-income ratio and the loan-to-value ratio have been raised from 40 percent to 50 percent. For instance, a person with 100 million won in annual income is allowed to borrow up to 500 million won, 100 million won more than before, when he purchases a 1 billion won apartment.
The policy package also allows those buying homes for the first time to draw more loans than before and cuts the tax on capital gains from home sales pending approval from the National Assembly.
Few would say the package was drastic enough to trigger property speculation, but the attempt to boost the housing market cannot be justified, given the relationship between rising apartment prices and income increases.
According to one estimate, the average apartment price in Seoul gained more than 100 percent from 2000 to 2011 ― 146 percent to be exact. On the other hand, the average household income rose 75 percent.
Another problem is home purchasers are allowed to borrow money at a time when household debt, which has already surpassed the 900 trillion won mark, is approaching 75 percent of gross domestic product. The administration acknowledges the high household debt level is one of the nation’s most serious economic problems.
The Lee administration may be attempted to take a new package of market-boosting measures if its latest action fails to produce the intended effects of raising home prices, albeit moderately, and boosting property transactions. But it should be reminded that overshooting may trigger real-estate speculation and that financial crises typically follow real-estate bubbles, as Carmen Reinhart and Kenneth Rogoff demonstrated in their 2009 book “This Time Is Different.”
