Stimulus Comes Home

Since taking office, Korean President Lee MyungBak has had a policy of stimulating the economy with construction and real estate goodies.  That may seem like a good idea, but only up to a point. Construction creates jobs temporarily, and there’s lots of guys working these days. But one must also create demand for the products produced.  Unless you’re blind or live in a cave, you’ve probably noticed the enormous amount of construction going on in Ulsan. Who’s buying them all?  For some places, no one is. We’ve reported in the past (here and here) on failed ventures  that now stand as monolithic testaments  to wanton real estate investment and construction without the underlying consumer demand to buy.

Lee’s latest stimulus is about creating demand for the buildings that are now there. In Seoul and capital cities, the price to income ratio (PIR) has been eased to make it easier for people to buy. It’s now 6.28, or nearly double the US rate of 3.55.  Go ask the Americans how well that’s worked out for them to have people buy homes they really couldn’t afford simply because someone made getting a mortgage easier. The reason PIR are there in the first place is to make sure you make enough to afford the place if the bank gives you a mortgage.

The Hankoreh has more details on this, but in my opinion, this is just a remake of something that has already caused major headaches elsewhere in the world.  One would think that watching a major economy implode would provide some objective lessons for others.