[Editorial] Soft Landing for Housing Market

The real estate market remains stagnant. Housing prices in the “Bubble Seven” areas, including the affluent Gangnam and Bundang districts around southern Seoul, are declining fast. Prices have dropped 30 percent after reaching a high in 2006, but no buyers have come forth. The average price of apartments in Seocho-dong in Gangnam fell below one billion won for the first time since November 2006. The market capitalization of old apartments to undergo reconstruction in four affluent areas is 77.55 trillion won (62.9 billion U.S. dollars), down four trillion won (3.2 billion dollars) or five percent. Moreover, around 160,000 units of new apartments remain unsold nationwide.

Curbing real estate prices has long been a government policy. The previous administration reduced the housing supply in Seoul and vicinity, where demand is huge, and levied a double tax through complex real estate taxes. It even expressed satisfaction with its measures. The sudden drop in real estate prices, however, has brought adverse effects such as increased household and corporate debts and decreased consumption, just as soaring property prices raised production costs and inflation.

The decline in stock prices has incurred huge losses to households this year – 63 trillion won (51.49 billion dollars) from individual investment and 41 trillion won (33.51 billion dollars) from indirect investment. The average mortgage interest rate, however, rose one percentage point from last year, leading to a hike in interest income of six trillion won (4.9 billion dollars). Many have given up buying a house and homeowners have cut spending. The real estate industry is urging the government to ease the rigorous loan to value ratio and debt to income ratio to jumpstart housing demand. These regulations have reduced the risk of lending to households, but also cut housing sales amid falling prices.

Falling real estate prices is a global phenomenon. Surveys show that 21 of 33 countries have witnessed a drop in housing prices (adjusted for inflation), including the United States, where plummeting home values led to the financial crisis. Last year, only five countries saw housing prices decline. The point is how to minimize the negative impact of lower consumption, acceleration of economic recession, bankruptcy of construction companies, and sluggish investment and employment. Rather than bursting the housing bubble at once, a soft-landing policy is needed.