[중앙시평] It’s time to stop debt-laden real estate development.

Seonyoung Park, Professor of Economics, Dongguk University

It’s an uncertain time about where the world and our society is going, but there are rare moments when we feel hope. It is time to confirm that we are moving in the right direction at a microscopic level. The ‘Real Estate PF System Improvement Plan’ announced on the 14th is one of them. You may be wondering why the real estate development finance system is important to the country. However, if you turn your head and look at China, a neighboring country suffering from a real estate recession, you will understand why.

China uses real estate for growth
Trouble with snowball debt and unsold homes
Korea announces PF improvement plan to increase equity capital
Bad investments and moral hazard must be resolved.

China’s real estate crisis, which surfaced after rumors of the bankruptcy of Hengda Group, China’s No. 1 real estate company, broke out three years ago, is firmly holding the real economy back. It is unclear whether China will achieve its economic growth target of 5% this year. The Chinese government made an unusual announcement that it would temporarily exempt short-term visas for nine countries, including Korea, starting this month. We can also visit China without a visa for up to 15 days, for the first time since the establishment of diplomatic relations between Korea and China in 1992. The analysis is that this is a measure to actively attract foreign tourists due to China’s sluggish domestic demand.

On the 8th, China’s National People’s Congress announced a plan to invest a total of 10 trillion yuan, or close to 2,000 trillion won in Korean currency, over five years to resolve local government debt. This measure contains a plan to convert local governments’ hidden debt into bond form so that local governments can repay it over time. Strictly speaking, it is not an economic stimulus policy, but a support measure for local governments’ fiscal soundness. This is why market participants who expected this time to include policies to actively stimulate the slumping domestic economy were disappointed. To make matters worse, some analyzes suggest that debt not captured in local government statistics may actually exceed 1 trillion won.

Why has China, the world’s second largest economy, become so troubled by real estate? One of the reasons is pressure on economic growth. Real estate development can increase economic growth rates in a short period of time, so local governments have actively utilized it to meet the central government’s goals. In China, where the proportion of real estate-related industries to GDP reached up to 30%, local governments and companies such as Hengda made large-scale real estate investments in low-profit projects during the boom, increasing debt. Since local governments cannot receive direct loans, they raise funds indirectly through shadow banking, and this hidden debt has become the detonator of China’s current economy. Currently, the number of unsold homes in China is approximately 90 million, which is twice the population of Korea.

Now let’s return to Korea. The core of the improvement plan announced this time is to induce the capital ratio when developing real estate to 20% in the mid to long term. If this system is implemented, real estate overdevelopment like in China can be prevented. The current system is that the developer can carry out a development project worth 10 billion won with 300 million won of equity capital. In the United States and Japan, you must have at least 3 billion won in equity capital. Donald Trump, the 47th President-elect of the United States, is a representative real estate developer. In investment, the lower the capital ratio, the greater the moral hazard. If a business fails, unreasonable investments are made because there is only a small amount of money to be lost.

Some point out that this announcement could lead to polarization in the real estate development industry and slow down real estate development, harming residential stability. I just want to say two things. First, the situation in which a large-scale business could be started with a small amount of capital was abnormal due to a regulatory vacuum. If you are disappointed that the opportunity to make an unusual amount of money has disappeared, you should consider that the confusion caused by the industry has made a soft landing in the real estate market uncertain, polarization has deepened, and the opportunity to buy a house has become more distant for the younger generation. Second, the problem in our real estate market is the housing shortage in major areas of the metropolitan area. The national housing supply rate already exceeds 100%. Housing stability is not achieved just because there is a lot of development. In other words, it is difficult to solve the problem without supplying new residential land in major areas. If we were to give additional points for a high capital ratio when selecting a green belt business in the Seoripul district, we would be able to see how difficult it is to meet the 20% requirement.

This policy is an example of how well our government can work if social acceptance increases. Let me add just one thing here. KRW 14 trillion, or 68% of the loans extended to insolvent real estate PF businesses, were provided by mutual financial institutions, Saemaeul Geumgo, and savings banks. In particular, Saemaul Geumgo, where a bank run occurred in some branches last year, is the largest shadow finance company in our economy, for which it is difficult to find proper statistics.

Coincidentally, Rep. Lee Sang-sik of the Democratic Party of Korea and Rep. Lee Seong-kwon of the People Power Party have proposed an amendment to the Saemaul Geumgo Act. Representative Yong Hye-in of the Basic Income Party also consistently points out problems with Saemaul Geumgo. We must also give strength to the voices and amendments of these expert lawmakers. We can have hope when there are more people working hard in their respective positions with responsibility and public spirit.

Seonyoung Park, Professor of Economics, Dongguk University

Could you please ⁣introduce yourself and provide your thoughts⁤ on the significance of the Real Estate PF System Improvement Plan announced ‍by‌ the Korean government?

How ⁤does the Chinese real estate ⁢crisis affect the Korean economy, and what are the potential long-term consequences of​ Korea not implementing similar ⁢reforms to its real estate⁢ development finance system?

What are some of the contributing⁣ factors to​ the current state‍ of Korea’s real estate market, and what structural changes need⁢ to be made to address these​ issues?

Given the potential risks associated with high debt levels in the real estate⁤ sector, what measures‌ can be taken to ⁤ensure that⁢ tighter regulations do not undermine economic growth or impact ​existing ⁤homeowners ‌negatively?

Do you believe that ‍mutual⁣ financial institutions, Saemaul Geumgo, and savings banks are adequately regulated and transparent in their‍ lending practices ‌related to real estate development financing?

To what extent should the government intervene in the real estate market to maintain stability and affordability for citizens, particularly in major metropolitan areas?

How does the role of ‍digital technologies, such as blockchain or AI, fit into the future of real estate development and finance in Korea and globally? ​Are there opportunities to⁣ leverage these technologies to improve transparency, efficiency,⁤ and ‌accessibility in the sector?