Updated January. 29, 2013 03:55
The sluggish real estate market in Korea is bound to hurt the people`s livelihood since real estate comprises 70 percent of their assets. The number of apartment transactions has reached just 796 this month in Seoul, which is home to 10 million people or a fifth of the population. The figure is just half the combined transactions made over the same period last year. Amid lackluster demand, apartment prices have plunged while rental fees have skyrocketed. Many who put up their homes for sale years ago are still waiting for buyers, while others are having a hard time repaying housing loans.
The wealth effect through property is disappearing, with the economy faced with a reverse wealth effect in which more people are tightening their belts due to falling home prices. Related businesses have also been hit, including real estate brokerages, movers, interior design companies and furniture makers, as well as daily construction workers and building materials suppliers. According to a Dong-A Ilbo analysis based on data from moving, interior and brokerage businesses, their revenue has dropped 908.5 billion won (832 U.S. million dollars) over the past five years. Construction investment also dropped for the third straight year in 2012, taking the bite out of economic growth. All of these are side effects from the prolonged doldrums of the real estate market.
Politicians are merely folding their hands behind their backs while the working class is suffering the most from this trend. During the election campaign, presidential candidates of both the ruling and opposition parties pledged to extend tax breaks for real estate acquisitions, but in vain. Though both parties belatedly said they will extend tax benefits amid transactions remaining stalled, a provisional session of the National Assembly has yet to be held. In a briefing by the economy section of the presidential transition committee, President-elect Park Geun-hye said, "Devise measures to normalize the housing market." But even a rough sketch of actions is nowhere to be found, heightening market uncertainty.
The outlook for the Korean economy is still bleak, with GDP growth at 2 percent level expected for the second straight year in 2013. A steady decline in housing prices will only aggravate the plight of the low-income class. The country has no room for speculative trading amid this dire situation. Stop-gap or belated measures and regulation centered on restricting speculation cannot warm the frozen housing market.
Both the ruling and opposition parties should reconsider their real estate policies, shifting from regulation to stimulating transactions. They should first eliminate a thorn stuck in a fingernail or a pebble in a shoe, since a tiny source of anxiety can cause much pain and distort supply and demand. The most urgent task is to ease regulation on people trying to buy a house. Tax breaks for real estate acquisition have been extended year after year since 2006, heightening fears of a tax cliff. A more fundamental measure is necessary, such as adjusting the acquisition tax in more realistic terms, to lower entry barriers to would-be home buyers. For young people buying their first homes, tax breaks or long-term, low-interest rate loans can be aggressively considered.
In Korea, taxes on real estate transactions are far higher than in the U.S., the U.K and Japan, as they account for 70 percent of all real estate taxes, with holding taxes taking up 30 percent. Deregulation of the transfer tax on multi-homeowners is necessary to legalize the supply of leased properties for them. In consideration of demographic shifts, tax breaks and financial support should go to leased homes to develop the leased housing market. The debt-to-income ratio can also be flexibly applied so that it does not erode the soundness of financial institutions. A balanced policy is crucial to send a warm air to the housing market.
Understanding the psychology of real estate is crucial. Demand rises if asset prices increase but falls if prices decline. Lawmakers should trust the Korean economy if they want to boost the sluggish property market. The economy is suffering a temporary cold, not chronic, unlike in Japan, which has suffered a prolonged recession. An urgent task for the Korean government is to revive the housing market and ease public discomfort.