Government too easy going before looming housing crisis

Real estate bubbles have reached an alarming level. Builders have won government approvals for building 604,340 homes during the first 10 months of this year, up 52.3 percent from the same period in 2014. The total number of houses whose construction has been approved will likely exceed 700,000 for the first time since 1990, when Seoul`s satellite towns such as Ilsan and Bundang were first developed. The housing construction boom will likely backfire, as it was caused by the perception that the slumping property market has hit the bottom and the government`s easing of mortgage loan regulation aimed at boosting the economy.

Houses whose construction is approved will be completed for moving in normally in two to three years. There are warnings that an oversupply of houses at the time of moving in will cause property prices to fall, resulting in many homes whose value is smaller than the loans and interests in 2017 or later. Many home buyers could become house poor as they will be broke due to mortgage loans or key money. Many home buyers could even find themselves unable to move into their new houses because of their inability to pay the remainder of the home prices.

Ominous signs have already shown up. The number of cities, counties and wards where less than 80 percent of new apartment houses to be built have been contracted for sale rose to 13 in the third quarter from six in the previous quarter. In particular, new apartment houses in Seoul and Busan, where apartment sales have boomed, are not selling as well as they did in the past. Due to a rapid increase in mortgage loans, the total balance of household debts, which are called a "time bomb," is expected to 1,200 trillion won (1.05 trillion U.S. dollars) before the end of this year.

If the United States increase its interest rates next month and Korea follows suit, increased interest payment burdens coupled with falling house prices will likely multiply the impact. Although the Financial Services Commission, the state financial watchdog, announced a measure requiring new mortgage loan takers to repay both interests and principals starting January next year, the move ended up increasing the demand for loans before the new rules are in effect.

Kang Ho-in, minister of Land, Infrastructure and Transport, said during a meeting with chief executives of housing companies on Wednesday that the rapid increase in approvals for new homes could become a burden to the housing market in the future. The industry is already concerned over an oversupply. The government should not sit idly in order not to cause a freeze in the property market ahead of the 2017 presidential election and pass the buck on to the next administration. Pan-governmental measures are urgently needed in order to control the housing supply from the initial approval stages and prevent home prices from plummeting and household debts from surging.