Archives for December 2007

Housing Bubble: Home Supply Down 30% in 2008

by Brendon Carr

The Maeil Kyungjae’s English edition reports next year’s housing supply will be down 30% over 2007, thanks to Roh Moo Hyun’s housing policies which include punitive taxes on homeowners, and price controls on new units:

Housing supplies are expected to decrease 30 percent next year compared to this year.

According to a joint survey conducted by Maeil Business Newspaper and a realty information agency Dr.Apt on December 20 on 363 housing construction companies regarding their 2008 initial sales plan which includes apartments, commercial & residential complexes, studio apartments and town houses, total 323,544 apartment units were revealed to be supplied in 602 business sites—28.6 percent lower than the 453,589 units planned for this year.

Such a sharp decrease in housing supply is a consequence of construction companies retiring from their new business projects with the adoption of the initial sales price cap.

But in the Korean-language version of this story at the Maeil Kyungjae, a detailed breakdown of the decline in units coming on-line in 2008 reveals that although there are steep declines in new supply outside Seoul and Taejon, the supply in Seoul will increase a bit more than 16% in 2008 (21,642 units to be sold in 2008, compared to 18,174 in 2007). Considering there are already 100,000 unsold units nationwide, over 90,000 of which are in the provinces, this decline seems natural and inevitable. They overbuilt out there, given where everybody wants to live is Seoul. And it’s a relief to see that the supply in Seoul has not been completely choked off—in fact, it’s still going up.

But note that housing supply is a trailing indicator. Korean apartment complexes take about three years from ground-breaking and the initial concrete pouring to completion and occupancy/sale. My guess is the real bite of Roh’s housing-market meddling will be felt in Seoul between 2009 and 2012. My own interpretation of the post-2002 run-up in Korean housing prices is that it was one of the inevitable aftereffects of the 1998-1999 “IMF” contraction. Remember when all those construction companies went bust or nearly so? Well, they had difficulty getting finance for new housing starts, which meant they couldn’t build as many new apartments as Korea really needs.

What’s really odd is how few apartments (and other units of new-built housing) are made available in Seoul.

Assuming that “Seoul” means the city limits under the direct control of Seoul Metropolitan Government, and not the Incheon-to-Suwon-to-Uijeongbu conurbation around Seoul, we can see that one out of four Koreans lives in the City of Seoul. (If you count the greater metropolitan area, it’s one of two.)

Yet even with the 16% year-on-year increase in inventory, 21,642 units in Seoul accounts for just 6.7% of the new housing being made available nationwide.

So while the US$2.5 million 900 sq. ft. apartment in Kangnam may experience a little air (okay, maybe a lot) being let out of its price, I foresee continued inflation of the housing bubble for the rest of Seoul, when the supply of apartments to us in the capital takes the same steep downturn as the provinces are experiencing now.

I just hope I can sell my apartment and cash out before the storm.

December 23, 2007 | Filed Under Economic News, Real Estate | 3 comments

LMB’s Canal Project: Full Speed Ahead, 2011 Completion

by Brendon Carr

Yes, I didn’t post during the Presidential campaign. Korea has rather stiff election rules that ban on-line comment, even from thinly-read foreign bloggers. Rather than waste my time with the prosecutors (Think they have better things to do? Think again) I sat out the Korean election cycle.

So, in case you hadn’t heard, Lee Myung-bak, the crook, won the election—trouncing the idiot, the weasel, the other weasel, and a host of kooks. (See why I haven’t been able to write about the election?)

Now that he’s been elected, LMB intends to make good on his campaign promise to pour concrete all over Korea: The Seoul-Busan Gyeongbu Canal project is scheduled to get started immediately upon his taking office, to be completed sometime in 2011. That’s just three or four years away.

The canal will link up Korea’s major rivers, on which barge traffic is fairly sparse now, to provide an alternative transport corridor to the country’s congested highway and rail links. When it’s done, waterborne transport of goods from Seoul-Busan—and on to the world—will be possible.

Like any political promise, a sop to the People’s Republic of Honam (the southwestern Chungcheong and Cholla Provinces) gets thrown in, almost as an afterthought:

Beside the 550-kilometer-long Gyeongbu (Seoul-Busan) Canal, construction of the 200-kilometer-long Honam Canal connecting the Youngnam River and the Geum River will also be conducted to be completed earlier than the Gyeongbu Canal, the official conveyed.

Of course, this is subject to an environmental-impact assessment (I’ll bet the results of that assessment are already known, though, since the completion date is being floated).

What’s the hurry? Pouring concrete means jobs. With the provincial construction industry on the ropes, there’s not a moment to waste:

President-elect Lee plans to execute his canal project in an attempt to attract private investment from home and abroad that will give an impetus to economic growth from the early days of the new Cabinet and there are actually a number of foreign funds which have already expressed their intention of participating in the project via large-scale investment, according to the official.

Anyone who remembers the breathtaking speed with which the Cheonggye-cheon project proceeded, and the generally-favorable results thereof, should be looking forward to the opportunity to be Hyundai Construction’s sub-contractor on the canal.

December 22, 2007 | Filed Under Economic News, Foreign Investment, Real Estate | 6 comments

Oops

by Brendon Carr

I got a message from a young lawyer seeking guidance on his career here in Seoul today. And then I deleted the message, stupidly, talking to my Dad on the phone about his impending heart surgery. If you wrote me about your career, send that message again. Sorry.

December 18, 2007 | Filed Under That Guy (Don't Be) | Leave a comment

FT: I-Banks Abandoning Hong Kong Hubs—Korea to Gain?

by Brendon Carr

Of course not! I was tantalized by the headline, and the possibility that the Korean government’s financial hub plan was finally going to show some results.

But it turns out that the banks are merely decamping to a cheaper part of Hong Kong—namely, West Kowloon, where the rents are 1/4 what they are in Central. Oh, cruel fate. When will the rest of the world wake up and recognize that Korea is the center of all things, especially of hub plans?

December 6, 2007 | Filed Under Hub of Hubs | Leave a comment

KFTC: Why Does Hyundai Sonata Cost 56% More in Korea?

by Brendon Carr

The English edition of the Chosun Ilbo reports noises from the Korea Fair Trade Commission over suspicious pricing of Hyundai and Kia automobiles (for the uninitiated these two are under common ownership, like Ford and Lincoln-Mercury). Apparently KFTC is investigating why the Sonata NF costs W16 million (about US$17,300) when sold to Americans, but W25 million (US$27,000) here in Korea. As a Korean consumer, I’m glad to see the KFTC start to dig into these issues:

The FTC has issued several warnings to Hyundai Automotive Group on the issue. In a briefing on its regulations on unfair business activities in January, the commission distributed a document which said that Hyundai Motor and Kia Motors have greatly increased their prices for small and mid-sized cars since they came to have a near monopoly in those markets with their merger in 1998. At the same time the automotive group lowered the prices of large cars which had to compete with imported cars, the FTC said in the document.  This, as a result, has imposed a greater burden on consumers with lower incomes, the FTC added.

“It’s clear that consumers have become the victims in an automotive market stuck in a monopolistic structure,” an FTC official said Tuesday.

It’s interesting to note the KFTC mentioning, if only in passing, that the effect of foreign competition has been to hold down consumers’ costs. I’d really like to see the KFTC making more of this issue, and campaigning to open Korean markets for the benefit of consumers.

But before we organize a mob of pitchfork-wielding villagers, there are actually a number of reasons which could explain at least part of the price difference. Korean prices include Value-Added Tax (VAT) of 10%, while US prices are generally quoted before state sales tax. The engine-displacement tax is also different—a 2.0 liter engine in Korea is considered “extravagant” and subject to a punitive excise tax, while in the US a mere 2.0 liter engine would be considered as a pipsqueak. Finally, there is also the chilling possibility that the costs of production are different: The Sonata NF is produced both in Asan and Montgomery, Alabama. Could the US worker be more economically efficient than “low-wage” Korea?

And I’m sure there is some element of price gouging. In 1998 I had the experience of purchasing a 19” Samsung computer monitor—a big beast of a CRT (remember those?) manufactured in Suwon, about 15 miles from Seoul. Through a friend on the Yongsan Army Garrison, I did a “hey mister” and had him purchase for me at the PX. The price was US$360, while the local price on the Korean economy was W850,000.

At that time the exchange rate was W1300 to the dollar, so a proper comparison would be a “US price” of W470,000 to the “Korea price” of W850,000. Manufactured goods aren’t exactly perishable like heads of lettuce. There is no reason for a car or electronic device to decline in value by 40-60% simply because it’s put on a ship and shipped 7500 miles to America.

December 5, 2007 | Filed Under Competition and Fair Trade Law | 3 comments

Non-Tariff Trade Barriers in Action: Keeping Budget Airlines Out of Korea

by Brendon Carr

The Ministry of Construction and Transportation (MOCT) put the kibosh last week on Korean Air’s defensive plan to launch Air Korea, a low-cost carrier for international flights. This probably portends difficulty for the City of Incheon’s plan to launch an internationally-focused low cost carrier, Incheon Tiger Air, in collaboration with Singapore-based budget carrier Tiger Airways.

MOCT cites its regulation requiring a Korean-based airline to have two (reported elsewhere as three) years’ accident-free domestic air service experience before being granted the right to fly international routes. The two start-up airlines Hansung Air and Jeju Air both fail this requirement, having suffered small mishaps in their early going.

The MOCT regulation means that Air Korea and Incheon Tiger Airways will need to endure two years of loss-making flights around this small country (Korea is only the size of Indiana, by the way), with aircraft better suited to short-haul international flights from Seoul to Shanghai, for example.

Foreign investors are prohibited from owning more than half of a Korean airline. Even if the market were open, though, the two-year domestic operation requirement effectively stops them from investing here because of the difficulty of making a go of things where the flight has to compete with rail and bus over such short distances. And that, my friends, is why our ticket prices remain quite high here in Korea.

December 4, 2007 | Filed Under Non-Tariff Trade Barriers | 3 comments