Seoul apartment prices hit a record high as presales shrink, liquidity surge looms

The Korean housing market is showing signs of heating up. Last week, Seoul apartment sale prices rose 0.26 percent from the previous week, according to data from the Korea Real Estate Board. It was the highest weekly increase since August last year.

Seoul apartment sale prices have moved up for 19 consecutive weeks.

The upward trend of apartment prices in parts of Seoul is threatening to spread to areas of nearby Gyeonggi Province with large populations, such as Gwacheon and Bundang. The government had an emergency meeting Friday to check the real estate market.

There are many factors behind the recent surge in housing prices, but its root cause lies in a supply shortage. This year, presales of new Seoul apartments decreased 28 percent year-over-year to 7,350 units, the smallest number in four years. In Seoul or densely populated areas like Seoul, new apartments are supplied through reconstruction or redevelopment. Spare units to be built, except units for existing landowners, are presold in installments to the general public.

Expectations for expansion of liquidity supply stimulate the sentiment of investment in the real estate market.

Many anticipate the Bank of Korea to cut the benchmark interest rate from the current 2.5 percent to 2.0 percent in the second half out of concerns about economic recession.

Liquidity is scheduled to increase when the government expends an additional supplimentary budget worth at least 20 trillion won ($14.6 billion). The budget plan to be unveiled soon will include local currency vouchers to be handed out to every Korean, a key campaign promise by President Lee Jae-myung.

The surge in Seoul apartment prices is also affected by the last-minute jump in the issuance of housing loans. People rush to take out mortgage loans to buy homes before strengthened repayment requirements are implemented next month. Last month, mortgage loans increased to 5.6 trillion won, the largest in eight months.

It is difficult to ignore people's expectation that housing prices will likely shoot up while the Democratic Party of Korea is in power, as they experienced in the Moon Jae-in administration.

People seem to believe that the real estate policies of liberal governments tend to be focused on curbing demand, which drives up home prices.

In fact, the Moon government treated owners of multiple homes like criminals. It took policies to impose heavy taxes on landlords and multihouse owners, lower presale prices of new apartments and tax "excess" profits from reconstruction. If apartment presale prices are mandatorily set below the market value of nearby apartments, advance buyers could make a profit, while existing homeowners shoulder the greater burden of reconstruction costs.

These measures distressed multihome owners in particular, but only drove them into selling their homes in less expensive areas and owning a single home in the most expensive areas, such as well-to-do districts of Seoul. As a result, housing prices in Gangnam and a few other affluent areas of the capital skyrocketed, sending home prices rising across Seoul more broadly.

Fortunately, President Lee pledged to vitalize reconstruction and redevelopment and avoid regulating homeowners with taxes. Yet, a "buy homes first" atmosphere is strong.

The government said that if housing price instability continues, it would consider expanding the regulated area where land trade is restricted. However, policies to hold down demand have limitations. They could hike up property prices near the regulated areas.

The first thing to do is draw up a blueprint for supply expansion. Though it is impossible to increase housing supply immediately, the government could calm uneasiness in the market just by showing a clear policy direction.

Developing unpopular areas far from Seoul will have a limited effect. High-demand areas need to be developed first. Reconstruction restraints in popular areas should be reconsidered to increase supply.

The new government should avoid repeating the policy error of regulating the market thoroughly. Restraining demand without expanding supply when prices keep rising instigates housing price hikes. That is a lesson that leftist liberal governments of the past have left behind.


khnews@heraldcorp.com