While the global market continues to
struggle, the South Korean economy remains
competitive and prepared to lead the Asia-Pacific
in dynamism, with its corporations still expanding
even as the shadow cast by the eurozone debt and
fiscal crises is hurting growth in a wider area,
from construction in the Middle East to automobile
manufacturing in the United States.
The
economy expanded 2.8% in the first quarter
year-on-year, the fastest pace in 12 months, and
the long-term outlook is improved by the
long-debated free trade agreement with the United
States coming into effect on March 15 and the
completion of similar negotiations between South
Korea and Colombia on June 26. Both are bound to
boost trade in the coming years.
Amidst
all this activity, one might expect the principal
drivers of
this economy, the people
themselves, to be at least enjoying financial
stability. Yet a faltering housing market is
spreading widespread damage among domestic budgets
and small non-exporting companies. The
government's nationwide housing index shows price
declines for four of the six months to the end of
April.
For Koreans, purchasing a home is
essential. Property not only constitutes the
physical manifestation of an individual's
aggregate wealth, but is also deeply tied to the
notion of success. Around 2007, the housing market
seemed to be on a perpetual rise. Prices were
going up and many, nervous about future prospects
of owning a home, took on significant financial
risks to ride the upward trend in the market.
Naturally, last year's long downward fall
was devastating for many people. Devalued homes no
longer served as sufficient collateral for loans
and the debt that many homeowners had taken on
became an overwhelming burden.
Even those
who did not ride the home-ownership market were
not spared: as that sector dried up, demand for
rental homes jumped, driving up rents. For
instance, security deposits for apartments, which,
unlike in the United States, make up the entirety
of the rent in one astronomical figure, have risen
on average by 24.9% throughout the country. Living
in Seoul has now become too expensive for many
people, and the market is pushing families away
from city centers and into the suburbs.
The cost of debt servicing and rent is
forcing down consumption. Businesses throughout
the country are having a difficult time making
ends meet. In particular, many small and
medium-sized enterprises that cannot supplement
losses in the domestic market with exports abroad
are operating on a loss.
The most hard hit
are smaller construction companies and businesses
that relied on selling home improvement products
such as floor tiles and paint. Their loss of
income is having a multiplying effect on other
small businesses by reducing the pool of
expendable capital, hitting the economy like a
cancer.
Recognizing the long-term
ramifications of instability in the housing
market, many groups are increasingly calling for
the government to act.
And by act, they
are calling for the state to do less - by relaxing
regulations on the housing market. Many of these
regulations were created by previous governments
in an attempt to ensure a fairer distribution of
property. However, with the market under critical
stress, immediate revisions, if not outright
abolition, of several laws are being urged to make
property transactions easier.
The Lee
Myung-bak administration, probably increasingly
worried about its legacy, is recommending several
revisions and new laws to the National Assembly
through the Ministry of Land, Transport and
Maritime Affairs. The government has said it wants
to see the issues debated immediately and for new
bills to be tabled for vote as soon as possible.
However, even the president's own party, the New
Frontier Party, has given only a tepid response to
the proposals.
Much of the new legislation
targets the taxes that the local governments levy
on transaction and acquisition of property, and
would affect the ability of many regional and city
governments to meet their debt obligations.
Incheon, for instance, has been constructing a new
subway line while also preparing for the 2014
Asian Games and is struggling to make ends meet.
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Legislators argue that previous
relaxation of regulations has failed to achieve
any visible success in revitalizing the housing
market. For example, the Seoul municipal
government had exempted citizens from paying large
portions of the taxes related to acquisition of
property until late last year, but this did not
yield any noticeable changes in the market.
Alongside maintaining infrastructure and
other public works, the threatened tax revenue
compliments social services and welfare spending.
Losses already incurred in tax revenue have forced
the state to make significant cuts in these areas,
making it likely that both the National Assembly
and local governments will fight to keep remaining
taxes and ensure at least some source of revenue.
In the worst case scenario, this situation
could spiral into economic implosion, but with so
much of the economy riding on foreign trade, there
is some hope that improved exports through recent
free trade agreements can have a positive effect
on the domestic market. On the other hand, having
the domestic economy pulled out from below could
negatively impact South Korean corporations'
competitiveness abroad.
The instability in
South Korea's housing market is not something that
the financial world focuses heavily on;
nonetheless, it stands as one of the biggest
obstacles to driving South Korea's economy
forward. And with the economic outlook for both
Japan and China uncertain, South Korea's stutter
could have an adverse effect on the recovery of
global market as a whole.
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