Moving in the opposite direction of the market

Real estate is more pressing and important to the country than all other issues.

Koh Hyun-kohnThe author is the executive editor of the JoongAng Ilbo. The rule of thumb that runs through the real estate market is that housing prices gain a bump-up every 10 years. The theory is fed by the chart showing a trend cycle which takes approximately a decade to play out the sequence of a rise in home prices leading to an increase in housing supplies which causes a fall in home prices and a subsequent rollback in the supply pipeline. Apartment prices rose sharply during the late Park Chung Hee government and administrations under Presidents Roh Tae-woo, Roh Moo-hyun and Moon Jae-in. The episode falls around every 10 years. Under the five-year term of President Moon, housing prices in Seoul soared by a whopping 62.2 percent. Given the steep increase, home prices should come down in the following Yoon Suk Yeol administration.

But the 10-year clock was wrong this time. Housing prices stagnated for the last two years and suddenly reversed direction this year. According to the posts on the Korea Real Estate Board, the median trade prices of apartments in Seoul took an upturn from April. The cycle didn’t work due to a critical shortfall in housing supplies. Of the new apartments scheduled to be supplied in the first half of the year, only 27 percent were delivered across the country — and 13 percent in Seoul — due to disruptions in the construction sites from the soaring prices of raw materials, increasing labor cost and a rising interest rate on top of stalled land acquisitions. The government may not meet its promise of delivering 2.7 million housing units within Yoon’s five-year term.

Amid the supply crunch, prices of apartments in Seoul hit new heights. The same scare about Seoul apartments becoming unattainable — which fueled frenzied buying during the Moon administration — began to kick in. The Yoon administration oblivious to the specter’s return went on with loan liberalization by offering cheap financing for housing purchases. Mortgages surged by 25.5 trillion won ($18.6 billion) in the first half alone. The Financial Services Commission (FSC) in June announced that the activation of the second phase of the stressed debt service ratio (DSR) rules would be deferred by two months to start from September. The move triggered a home buying spree before loan regulations became stricter. The government has added fuel to the market heat. It should have acknowledged its misjudgment of sending the wrong signal to the market and expedited the implementation of the stressed DSR as planned. But either out of stubbornness or negligence, the government chose to hide its head in the sand.

Its policy fumble is not its first. Last year, the government doled out 40 trillion won to subsidize cheap loans for home purchases. As it didn’t set any cap on income for the borrowers, even the rich took out loans to buy apartments, causing an exceptional housing inflation when global real estate markets slumped amid high interest rates.

Political influence worsened the situation. The presidential office pressured the Bank of Korea (BOK) to lower the benchmark rate, pointing to the softening inflation near the target zone. But fixing the interest rate is the exclusive authority of the central bank. Unauthorized government meddling can fuel wrong expectations and restrict the maneuvering room for the BOK even if it wants to bring down the benchmark rate. The government and politics must not interfere with the central bank’s monetary policy. No developed economies’ governments meddle with their central bank’s rate policy as the stretch of political influence can cause disastrous outcomes.

The government belatedly held a cabinet meeting on the real estate market last month. The hastily summoned meeting didn’t present any new measures, as the government only reiterated a plan to deliver 236,000 housing units as part of the third New Town project around Seoul. The measure could hardly quench the heat in the capital market. The government last week announced a follow-up scheme to additionally supply 210,000 units in Seoul and nearby regions. The plan could take many years to materialize, and again can fall short of appeasing market instability and the demand in the capital.

The government stressed that it would “preemptively rein in demand.” But it was the government that sparked demand in the first place through easy loans. Given its incoherent policy mix, negligence and tardy response, I seriously wonder if the government can tame the real estate market.

Real estate has stayed in the backseat under the Yoon administration. The government has no chance of winning in its tug-of-war with the market if it appears to be soft and tolerant of high prices. I hope the government sends a consistent and powerful message to the market and tighten housing loans before it’s too late.

Housing inflation is the source of multiple ailments, including wealth polarization and our ultra-low fertility rate. Real estate is more pressing and important to the country than all other issues the government made much fuss about — like the World Expo, the medical school admissions quota increase and the East Sea gas exploration.

Real estate is more pressing and important to the country than all other issues.