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The Lee Myung-bak government has taken measures to rescue the real estate market, such as relaxing the debt-to-income ratio (DTI) when receiving a mortgage in all Seoul and capital region areas with the exception of Gangnam and investing directly and indirectly some 5 trillion Won ($4.5 billion) to get rid of some 40 thousand unsold apartments.

The measures, however, are being seen as focused only on maintaining the real estate bubble and saving insolvent construction companies. Despite the root current real estate problem being the over-provision of homes and low end-user purchasing power due to high parcel prices, leading to fewer deals, the Lee government has been unable to find a solution to this fundamental problem.

The domestic housing bubble has already passed the danger point. South Korea’s housing price to income ratio (PIR) was 6.26 as of 2008, close to double that of the U.S. (3.55) and Japan (3.75), which are experiencing serious after-effects of the collapse of the housing bubble. From the time of the Roh administration, the government has been able, to some extent, to ward off the financial losses resulting from a bubble collapse through DTI regulations, but since the launch of the Lee Myung-bak administration, the trend has been to slowly relax these regulations.



High housing prices and the resulting excessive household mortgages are dragging down the South Korean economy. Household debt in South Korea stood at 734 trillion Won as of last year. As of last September, household debt to GNP was 80.9 percent, 70 percent higher than the OECD average. If the commercial interest rate begins to rise, the burden on debtors to repay their debts will necessarily rise, so as a result, giving rise to serious concerns about household financial instability. The government also agrees with these concerns. Financial Services Commission Chairman Chin Dong-soo recently pointed out the dangers in relaxing loan regulations, saying the construction industry is asking for relaxation of regulations on real estate loans, but the issue must be viewed from the perspective of healthy households and banks.



The Lee government has issued a general mobilization to a number of public institutions, including the Korea Housing Guarantee Co. Ltd,(KHGC), Korea Land and Housing Corporation and National Housing Fund to reduce the construction industry’s number of unsold houses. If the public institutions that buy unsold houses are unable to unload them, their debts increase, which ultimately are filled with taxpayer money. Han Man-hee, the head of land policy at the Ministry of Land, Transport and Maritime Affairs, said they plan to strictly evaluate parcel price and feasibility when mass-purchasing unsold parcels so as to prevent moral hazards from the industry.

The Lee government is also mobilizing various tax support measures to rescue the construction industry. The time limit on the registration tax and property tax reductions on unsold houses purchased by the Korea Housing Guarantee Corporation extends to next December, but the government is considering an extension. For Real Estate Investment Trusts (REITs) and funds purchasing real estate, the government will not levy additional taxes and exempt them from the comprehensive real estate tax. Park Won-gap, the head of Speed Bank’s real estate research group, said the construction firms have failed in managing the risk of their housing projects, and the government’s measures could bring criticism of merely being aid ladled out that will once again bring about the problem of the construction companies’ moral hazard.

There is criticism that the Lee government’s plan to help the construction companies will be a stumbling block in the South Korea’s sustained economic recovery by covering over, rather than weeding out, insolvency. An analyst at one securities firm said we cannot say asset prices will continue to climb, and warned that while floating the bubble might paint a suitable picture on a temporary basis, it will lead the country down an even more difficult and singular path in the future.

Please direct questions or comments to [englishhani@hani.co.kr]