Speculators Fuel Real Estate Fever in South Korea : Pacific Rim: Flush with the bounty from the country’s trade surplus, corporations are pumping money into property. The practice is pricing the middle class out of housing.
Hong Won Tack earns a modest salary--about $24,000 a year--as an economics professor at Seoul National University. But that did not stop him from getting rich.
He spotted an opportunity to invest a few thousand dollars in real estate here in the 1970s, then watched his investment go through the roof. One parcel of land that he bought south of the Han River increased 100 times in value before he sold it for $500,000 two years ago.
“I got kind of a guilty feeling when I materialized half a million dollars so effortlessly,” Hong confessed. “I asked myself, what kind of system do we have? My case was just peanuts.”
Hong brought along his personal sense of discomfort over real estate speculation when he recently joined a panel of experts advising the government on land policy. Now he is an outspoken critic of the administration of President Roh Tae Woo for its “lack of political will” in tackling what he sees as the most serious social problem facing the nation.
Despite South Korea’s economic miracle, its middle class--wage earners who should be the bedrock of any stable democracy--simply cannot afford first homes. Real estate mania is to blame.
“This is not a healthy market economy when one person can earn millions of dollars in a year without lifting a finger, while another toils away for mere wages,” Hong said. “It’s hard to visualize a victim because nobody really gets killed. But to an economist, this is worse than murder.”
Indeed, although many South Koreans are enjoying better living standards and greater disposable income than ever before, the dream of home ownership remains an elusive goal that fuels resentment among society’s frustrated have-nots.
Hong’s land committee and the Korea Land Development Institute calculate that up to 76.9% of all privately held land was concentrated in the hands of 6.2% of all property owners in 1988.
The government is in the midst of an ambitious program to build 2 million new housing units in by 1993, including 450,000 dwellings this year alone. But mortgages are difficult to obtain, and cash is even harder to raise--unless the buyer already owns property.
Kim Bang Kyu, 48, a sales executive for an electronics manufacturer, said he has all but given up hope of buying a house on his $18,000-a-year salary. Still, he opened an account the other day at the state-run Korean Housing Bank.
“It’s impossible to buy a house with (just) an account at this bank,” Kim said. “I’m only doing this to get my wife off my back.”
Choi In Soo, 39, a worker for a concrete company, saved for 10 years before he could buy his 750-square-foot apartment in Pugok, an hour’s train ride south of Seoul, for his wife and two children. He had to put down 65% in cash, and even now must take in boarders to make ends meet.
“I get angry when I think about the rich people who make it their work to speculate on real estate,” Choi said. “It’s terribly wrong when something so basic as housing is exploited like this.”
Urban housing prices continue to skyrocket in South Korea, echoing the frenetic speculative boom in Japanese real estate. The root cause in South Korea, as in Japan, appears to be an oversupply of cash from the country’s trade surplus. Corporations are pumping money into scarce real estate, pushing values higher. And a moribund stock market makes land an attractive investment.
Accurate statistics are hard to come by, but conservative data published by the government suggests that the real estate market is about to burst out of a 10-year cycle of growth and decline that has repeated itself since the late 1960s. Real estate prices, instead of peaking in 1987, when they rose by an average of 14.7%, continued rising--by 27.5% in 1988 and an estimated 32% last year.
The price spiral is steepest in Seoul and other major cities. Some Seoul apartments appreciated by up to 30% from mid-December to mid-February, according to the March 6 issue of Real Estate Data Bank magazine.
Floor space in the fashionable Hyundai Apartments in Seoul’s Apgujungdo district sells for upward of $275 a square foot.
Already, South Korea’s real estate fever is starting to make itself felt in overseas markets as the government relaxes controls on capital outflow. Last year, corporations were allowed to start investing in foreign real estate. And, like their counterparts in neighboring Japan, South Korean investors see bargains in U.S. land. But so far, Seoul’s investors have been relatively low key.
“Korean investment is not so noticeable (as from Japan), but there is a lot of money coming in,” said Walter Park, a Los Angeles-based real estate agent who advises South Korean conglomerates on property deals. “Koreans see the American backlash against the Japanese investment pattern. They prefer not to go after conspicuous trophy properties.”
Back home, the Seoul government is testing drastic measures to dampen speculation. In 1988, the Construction Ministry tightened regulations that require large-scale real estate transactions in designated areas to be screened through a registration system.
Hong derides this as the “bribery system.”
Last year, the National Assembly passed a set of three laws aimed at cracking down on urban speculators by penalizing families that hold excessive amounts of residential land, charging punitive administrative fees for certain kinds of development generating windfall capital gains and imposing a special capital-gains tax on sales of idle non-residential land.
“Our economy will never be normalized unless speculative investment practices disappear,” Cho Soon, economic planning minister and deputy prime minister, told a special “economic crisis” advisory committee in late February.
Yet Hong, the economist, faults Cho and President Roh’s administration for missing the point on land policy. The tough government measures look impressive on paper, but they are made ineffective by gaping loopholes, he said.
For example, South Korea’s Supreme Court has upheld the right of a property owner to register deeds in the name of an associate, while protecting his investment with a separate contract that does not have to be reported to tax officials or regulatory authorities.
Although a capital-gains tax of 40% to 60% applies to real estate transactions, assessed values are so far out of line with market rates and loopholes are so abundant that Hong estimates that less than 1% of the theoretical tax is actually collected.
Meanwhile, the Roh administration is planning to roll back a tough new property tax imposed last year that levies a payment of up to 5% on consolidated real estate assets. The new ceiling would be 2%, and typical tax rates would probably remain well below that. Traditionally, South Korean property owners have paid a tax of about 0.3% on assessed values, which are about a third of market rates--a negligible burden for those holding real estate for speculation.
“None of the politicians are seriously interested in land reform, neither the ruling party nor the opposition,” Hong said. “There’s no political will to do anything. People in power have too much vested interest.”
Hyun Hong Choo, the cabinet minister in charge of government legislation, said the government holds that it “must alleviate this strong sense of alienation felt by the have-nots” who own no property.
The high cost of land is also a drag on economic growth, he added.
“But land is still scarce, and there is a lot of money out there,” Hyun said. “People will find every loophole and every opportunity to invest in land. The boom will continue, whether we like it or not.”
Hong agrees, even though he does not like it.
“If I have any extra money, I’ll continue land speculation,” he said. “There’s no reason not to. The government’s reform package has nothing in it to deter me.”
