(EDITORIAL from the Korea Herald on Oct. 23)

Editorial (yonhap) - Extraordinary times call for extraordinary measures: This is why the latest government measures to prop up the ailing construction industry and resuscitate the moribund real-estate market -- which would be objectionable under normal circumstances -- are being accepted, albeit not without reservations.

In an indication of the gravity of the economic situation, the government
unveiled a second major package Tuesday following the announcement of a $130
billion package of measures to stabilize the financial market.
The government plans to spend about 9 trillion won to bail out construction
companies, an action which it hopes will buoy the industry, which accounts for 15
percent of Korea's GDP. Three trillion won will be used to buy idle land from
home builders and 2 trillion won will be used to buy up unsold apartments. The
government will also allow 2 trillion won worth of contracts signed by the Korea
Land Corp. and private builders to be dissolved.
To breathe life into the virtually frozen real-estate market, the government said
that some areas in Seoul and the greater Seoul area would no longer be
"speculation-watch zones." The government expects the move to boost demand for
housing as buyers will be able to take out bigger mortgages.
Capital gains tax will be exempted for two years for home owners who purchase a
second house, and those who buy new housing in the "speculation-watch zones"
using a conditional mortgage loan will be given two years to sell their existing
homes, instead of the current one year. Other measures aimed at stimulating
demand include extending home-equity loan periods and reducing the cost of
mortgages by lowering the interest rates on certificates of deposit.
Given the significant size of the construction industry and its impact on the
economy, the government had no alternative but to step in to avert a major crisis
-- particularly in light of the unfolding global economic crisis. This marks the
first time since the financial crisis of 1997 that the government has injected
public funds into the building industry.
More than 160,000 housing units -- about 138,000 of them located in the provinces
-- remain unsold. This represents the largest number of unsold homes ever.
While the current financial crisis has exacerbated the difficulties for the
construction industry, unsold homes were a problem even before all of this.
Construction companies went on a building spree, marked up the apartment prices,
and now find themselves unable to sell them.
Financial institutions also put themselves at risk by recklessly providing
project financing for construction companies. More than 97 trillion won in
project financing loans may be at risk.
Not only is bailing out these irresponsible companies against market principles,
it also invites moral hazard -- the expectation that the government will come to
the rescue again the next time they are in trouble. The government, therefore,
must be judicious in injecting public funds, and businesses must also be made to
shoulder some of the responsibilities. Mechanisms must be put in place that will
ensure that the companies resolve their problems rather than rely on government
bailouts.
The lifting of the "real-estate speculation watch" designation in coveted areas
may do more than just revive real-estate transactions -- it may ultimately bring
back frenzied real-estate speculation.
Easing mortgage restrictions, which will allow home buyers to borrow more, has
the attendant risk of people defaulting on their loans if the economy fails to
improve and interest rates soar.
As the country weathers the global economic crisis, there will be times when the
government will be pressed to take quick, decisive action. In doing so, it must
also take into consideration the long-term effects of its actions.
(END)