Posted By: Janine Delacroix

By Anna Fifield in SeoulWed Nov 15, 7:35 AM ET

The South Korean government on Wednesday unveiled broad measures to curb demand and increase supply in the housing market as surging apartment prices create political upheaval for president Roh Moo-hyun's beleaguered administration.
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Widespread resentment of the spike in property prices and the belief that speculators are profiting at the expense of ordinary families have pushed Mr Roh's popularity down to new lows, according to opinion polls.

Kwon O-kyu, finance minister, offered a public apology on Wednesday for the price surge, a day after the construction minister and two presidential aides tendered their resignations over the same issue.

The finance, construction and environment ministries on Wednesday announced plans to sharply increase the supply of apartments and dampen demand by tightening borrowing conditions and imposing new taxes in the government's eighth package of real estate reforms in three years.

Mr Kwon told reporters on Wednesday that if action against speculation succeeded, "There is a good chance that stability will be restored in the housing market".

The new package includes provision for a 17 per cent increase in the number of homes to be built in the Seoul area through 2010, equal to 125,000 additional units. The government will also target a 25 per cent reduction in the price of new homes by reducing development costs.

Taking on speculators more directly, the government will raise transaction taxes on those who own multiple homes and tax windfall gains on reconstructed houses.

The National Tax Service said it would crack down on suspected tax evasion in areas where property prices have risen sharply. The Financial Supervisory Service said it would cut the amount that South Koreans can borrow from non-banking financial firms to buy homes in designated "speculative" areas from the current 70 per cent of the property's value to 50 per cent.

In most areas around Seoul, the agency will also tie borrowing limits to a property buyer's income rather than the value of properties being purchased.There have been concerns of another credit crunch in South Korea amid soaring mortgage borrowing. Bank of Korea data showed that mortgage borrowing grew by Won2,700bn between September and October, the fastest pace since May.

Oh Suk-tae, a Citigroup economist in Seoul, expressed doubt that the latest measures would be any more effective than previous attempts to dampen the market.

"Suppressing demand is easy - tax and financial institutions can take care of that - but promoting supply is much harder," he said. "It will take a lot of money and time - three, four or five years."

The Bank of Korea reported that home prices rose 1.5 per cent in the month of October, the fastest increase in three years. Bank governor Lee Seong-tae last week described the surge in house prices as "worrying".

But compared with other countries suffering from real estate booms, South Korea's house price inflation rate might not seem extreme. The index compiled by Kookmin Bank (NYSE:KB - news), the country's largest lender, put annual house price inflation at only 6.5 per cent last month, rising to 10.8 per in Seoul.

Indeed, the International Monetary Fund last week tried to temper fears of a housing-related economic crisis. "We don't really view increases in South Korean property prices as a bubble because we think there are real underlying reasons for higher housing prices," said Jerald Schiff of the IMF.

Real estate policy is especially controversial in the affluent suburbs of southern Seoul where many of the country's elite live and where the best schools are located.

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