Is South Korea's real estate bubble real?

Is there, or is there not a real estate bubble in South Korea? And if it does exist, does the real estate bubble endanger South Korea's nascent recovery?

There is little doubt that if you want to buy an apartment or a home in one of the wealthy areas of Seoul, the real estate values in these neighborhoods are clearly inflated. But there is some doubt that real estate price inflation extends beyond a small geographical area.

No matter, the South Korean government is so convinced that there is a dangerous real estate bubble that it has proposed and is about to enact some very harsh tax legislation directed at the real or imaginary real estate speculators.

And the Bank of Korea (BOK), South Korea's central bank, has been talking about raising interest rates. Right now the rates are low and many think that these low rates have stimulated consumer spending and helped initiate an economic recovery. Others---mainly foreigners--think that there really is no dangerous bubble and what would be really dangerous is raising interest rates.

Both Standard & Poors and Fitch Ratings are on record as saying that the bubble only exists for the wealthy, and that the BOK should leave interest rates at their present low levels.

A government sponsored poll, however, released just as Market: Asia Pacific was going to press, said that nine out of ten South Korean survey respondents felt there was a dangerous real estate bubble and that the government should curb it.

The Korea Times (Seoul) reported in mid-August that speculation that the BOK was thinking about raising interest rates was contrary to what the governor of the bank is saying in public. The Times said that real estate prices had stabilized after the government announced is proposal to basically tax the windfall profits of real estate speculators.

The Times also quoted the BOK's governor to the effect that now that real estate prices had stabilized there might not need to be an interest rate hike.

A summary of developments related to the real estate bubble posted on Yahoo's Asia Pulse site on August 29, 2005 included two facts that may bear heavily on the situation.

Sourcing government statistics, Asia Pulse said that people in the top 1 percent wealth segment in South Korea held 51.5 percent of the land in private hands. And 5 percent of the people in that top bracket held 82.7 percent of that roughly half the privately held land in the country.

This is certainly not a situation that is conducive to real estate prices being collectively determined- in a free market environment--the supply is far too restricted.

Will the government's tax policies work to end price inflation in luxury real estate? It worked once before. But all that land in so few hands is a recipe for trouble at some point.

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