S. Korea Snap Up U.S. Homes, Sparking Capital Exodus Concerns

By Kim kyoungwha

March 6(Bloomberg) - Kim Jong Hyun, a Seoul soft ware programmer, is looking to invest $1million in a four-bedroo, house with three-car garage and swimming pool - in New jersey.

That sum would buy only a three-bedroom apartment in the South Korea capital, where real estate prices hit a four-year high in 2006. The U.S. gives him \' \' a better quality, more spacious house, \' \' said Kim,32.

Kim, who is married, says he has no immediate plans to move and is buying as an investment. He is shopping through Rootiz Korea Co., a Seoul firm specializing in property.

Koreans spent $780million on real estate abroad in 2006, 34 times more than in the previous year, and almost half of it was in the U.S. Most people bought houses rather than commercial propery, according to the central bank.

the surge followed the relaxation in May of controls imposed during the 1997-1998 Asian financial crisis. This year, the Finance Ministry tripled the maximum that individuals can spend on overseas investment properties to $3 million.

The changes may have been overdone. An increasing of capital risks cooling growth in the $788 b(m)illion economy as the current account, the broadest measure of trade, heads for its first deficit in a decade, economist Kim Jae Eun said.

"Capital outflows will only Intensify and, coupled With Koreans inclination to travel and study abroad, will force the current into the red," said Kim, who tracks the economy at SK Securities Co. in Seoul.

Add the slowest export growth in five years and a record services account shortfall, and South Korea faces a deficit of as much as $4 billion this year, she said.

10-year Low

Asia\'s third-largest economy came up short by $510.7 million in January. Last year\'s $6.1 billion surplus in the flow of goods, services and investment will narrow to a 10-year low of $2 billion in 2007, the central bank estimates. Economic growth may slow to 4.5 percent from 5 precent.

Hyndai Economic Research Institute expects a current account deficit of $3 billion this year and Samsung Economic Research Institute forecasts $1 billion.

"Demand for study abroad is fueling demand for overseas property" said Park Sang Hyun, chief economist at CJ Investment & Securities Co. in Seoul, who predicts a balanced account. "The capital flow will grow bigger as the population ages"

Seoul overtook Tokyo and London to become the world\'s second-most expensive city after Moscow in 2006, according to mercer Human Resource Consulting LLC in New York.

Apartments in the city\'s affluent suburbs, south of the Han River, cost 1.2 billion won($1.3 million) on average, according to Speedbank Co. a Korean Property information provider.

Mortgage Curbs

In addition, the government is trying to cool home prices and rein in lending. This year it has curbed home buyers from borrowing more than 40 percent of their annual income.

"There will be an explosive growth in overseas property investment" said Sanders Lee, 33, chief executive officer at Rootiz. "We are establishing global networks with overseas property agencies in 25 countries"

Buyers poured 48 percent of their money into the U.S. in 2006. Canada drew 23 percent and China 5.9 percent, according to the central bank.

"Those who want to send kids overseas for education favor the United States and Canada, while China, Vietnam and Dubai are preferred by cash-rich investors" Lee said.

Son Ji Hee, 38, a Seoul homemaker with two children, is hunting for a second home in Singapore.

Regulations \'Rampant\'

"I\'m looking for a three-bedroom house to raise my children in an English-speaking environment" Son said. "If I buy one more, it won\'t be at home where regulations are rampant and tax is growing heavier."

Korea levies an annual tax of as much as 3.5 percent on homes worth 10 billion won and a capital gains tax of more than 50 percent on second properties.

U.S. homeowners pay 0.17 percent to 1.82 percent of their home\'s value in taxes, depending on the state, according to 2005 data from the Tax Foundation, a Washington research group. The applicable this year, according to the Asset Management Association in Seoul.

Excess Dollars

Policy makers play down the risks. Money sent overseas is draining the currency market of excess dollars and helping pare the won\'s gains, said hwang Kun Il, a director of foreign exchange at the Finance ministry.

Talk of a property bubble in some markets abroad will limit buyers enthusiasm, said Kim Kwang Sik, senior economist at the central bank\'s international bureau.

Home-shopper Kim says he\'s tired of regulations and high taxes in Korea. With a sister in New Jersey\'s neighboring state of Pennsylvania, he may even move to the U.S. from Seoul, where he and his wife now divide their time between a 600 million-won apartmant and his parents\' 1.5 billion-won home.

"Living in the States is incomparable," Kim Said.

To contact the reporter on this story: Kim Kyoungwha in Seoul at kkim19@bloomberg.net.

Last Updated: march 5, 2007 12:22 EST

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