Identifier
Created
Classification
Origin
06SEOUL4138
2006-12-02 03:26:00
CONFIDENTIAL//NOFORN
Embassy Seoul
Cable title:  

KOREA'S RAGING REAL ESTATE SPECULATION

Tags:  EFIN EINV ECON SOCI PGOV KS 
pdf how-to read a cable
VZCZCXYZ0003
PP RUEHWEB

DE RUEHUL #4138/01 3360326
ZNY CCCCC ZZH
P 020326Z DEC 06
FM AMEMBASSY SEOUL
TO RUEHC/SECSTATE WASHDC PRIORITY 1651
INFO RUEHBJ/AMEMBASSY BEIJING PRIORITY 1645
RUEHKO/AMEMBASSY TOKYO PRIORITY 1745
RUEHHK/AMCONSUL HONG KONG PRIORITY 2993
RHEHNSC/NSC WASHINGTON DC PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
C O N F I D E N T I A L SEOUL 004138 

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EB, EAP/K
TREASURY FOR IA/ISA/POGGI,
NSC FOR TONG

E.O. 12958: DECL: 12/02/2016
TAGS: EFIN EINV ECON SOCI PGOV KS
SUBJECT: KOREA'S RAGING REAL ESTATE SPECULATION


Classified By: Classified by Amb. Alexander Vershbow for reasons 1.4 (b
/d).

SUMMARY
--------
C O N F I D E N T I A L SEOUL 004138

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EB, EAP/K
TREASURY FOR IA/ISA/POGGI,
NSC FOR TONG

E.O. 12958: DECL: 12/02/2016
TAGS: EFIN EINV ECON SOCI PGOV KS
SUBJECT: KOREA'S RAGING REAL ESTATE SPECULATION


Classified By: Classified by Amb. Alexander Vershbow for reasons 1.4 (b
/d).

SUMMARY
--------------

1. (C) Korea's speculative fever in metropolitan real
estate recently claimed three victims: Construction Minister
Choo Byung-jik and two Blue House presidential advisors,
Senior Secretary on Public Information Lee Baek-man and
Economic Advisor Chung Moon-soo. Their departures were
carefully orchestrated in an effort to insulate the Roh
administration from its long-standing inability to cool
speculation and lower housing prices for young entry-level
families. Housing policy is shaping up as a major economic
issue as presidential campaigning gets underway for the
December 2007 elections. End summary.

A FROTHY MARKET
--------------

2. (SBU) Seoul is well known as the world's second most
expensive city after Tokyo. Several economists argue the
Seoul metropolitan area is also well on its way to forming a
speculative real estate bubble reminiscent of the Japanese
one in the late 1980's. Seoul real estate has quintupled in
value over the past decade, with luxurious apartments (4,400
square feet) now selling for USD 6.1 million in Seoul's
upscale Kangnam district. Local newspapers frequently print
front-page articles on the rampant real estate price
inflation, and sharply criticize the Roh administration for
its failure to curb speculation. While luxury apartments
draw much of the headline attention, the broader concern is
that spiraling prices are driving first-time buyers and young
people out of the market.

ANTI-SPECULATION MEASURES
--------------

3. (SBU) With public concern about real estate mounting,
Construction Minister Chung Moon-soo and his Blue House
colleagues took the lead on supply-side ROKG policies to curb
speculation over the past year by:

--announcing several government-sponsored housing projects
that will build 867 thousand new units by 2010, largely in

densely packed dormitory towns around Seoul.

--lowering bid prices in government housing projects.

--easing construction rules for small apartments to permit
increased floor areas.

--weighing additional measures such as requiring private
builders to disclose construction costs and, possibly,
capping apartment prices in the private sector.


4. (SBU) In addition, a new demand-side measure was
unveiled to tighten mortgage lending (by capping the
debt-to-income ratio to 40 percent) in the wider Seoul area.
The lending measure follows on the heels of an August 2006
announcement that capital gains tax on second home sales
would rise from 20 to 50 percent, effective 2007. This
delayed tax measure only served to add fuel to the
speculative fire and further drove house prices up this year,
as investment housing flips became more pronounced.

THREE HEADS ROLL
--------------

5. (SBU) Against this backdrop, on November 16, President
Roh accepted the resignations of his three top policy makers
on housing policy. Construction Minister Choo went because
he was publicly outed for investing in an up-scale housing
project in downtown Seoul, sparking considerable public
outrage. Blue House Advisors Lee and Chung went for their
high-profile association with Roh-administration real estate
measures; both had conducted public interviews touting the
potential success of the measures.


6. (SBU) Construction and Transportation Ministry (CTM)
contacts note the trio's recent steps constituted the Roh
administration's eighth round of measures to cool real estate
price rises. One CTM deputy director suggested, after his
minister's departure, that the Ministry of Finance and
Economy (MOFE) needs to weigh in, raising mortgage rates over
the longer term, to dampen demand. Following suit, MOFE
raised bank reserve requirements on November 23 from 5 to 7
percent of demand deposits, thereby reducing funds available
for mortgages.


7. (SBU) Of course, this reserve hike )- MOFE's first
since 1990 -) has engendered even more controversy because
it hits hard many first-time buyers and small businesses
along with speculators. Just as the reserve requirement
starts to bite, construction sector investment is dropping,
down 3.9 percent in the second quarter from the preceding
quarter ) and down 1.3 percent in the third quarter of this
year. The Roh administration's tax and lending measures may
be starting to cool real estate demand in combination with a
cyclical contraction in the market, just as key policy
architects depart their jobs.

COMMENT
--------------

8. (C) High housing costs are a big liability for the Roh
administration, as the ruling party coalition struggles to
address mounting public perceptions of economic malaise
flowing from flagging economic growth, declining exports, and
growing income disparity. Indeed, most of our assembly
contacts on both sides of the aisle point to housing prices
as a major issue likely to dominate campaigning in the
lead-up to presidential and national assembly elections in
December 2007. The orchestrated departure of three senior
officials over housing policy signals the ruling coalition
badly wants to regain public trust in its policies. However,
many observers feel Seoul metropolitan residents (consisting
of about one third of Korea's total population) are too flush
with liquidity to cut back on their rampant speculation. As a
result, the ruling party coalition seems unlikely to get
housing prices to cooperate enough to make it look good in
the lead-up to national elections next year. End comment.
VERSHBOW