[EXCLUSIVE] Korea's real estate policy 'counterproductive': OECD

OECD Economics Department Korea/Sweden Desk Christophe Andre / Courtesy of Christophe Andre

Gov't urged not to defy market principle of supply, demand

By Lee Kyung-min

Placing a price cap on new apartments, the strictest regulation to curb real estate speculation, will fail to produce its intended outcome here unless preceded by efforts to remove excessive obstacles to supply, coupled with promoting competition among builders, according to a senior OECD economist.

"One measure which may be counterproductive is the price cap on new apartments," OECD Economics Department Korea/Sweden Desk Christophe Andre told The Korea Times in an email interview.

The cap in his view risks hampering supply, and thus worsening tension on prices in the longer term. Instead, ensuring that there is enough competition between developers is the best way to prevent excessive increases in prices of newly built apartments.

Developers may still enjoy windfall gains after a price hike of the land they own following regulation changes. And taxing such gains in a transparent manner, he noted, would be more efficient than price controls, given any signs of a continued imbalance between supply and demand is likely to fuel expectations of further price jumps and hence speculation.

The Paris-based economist who oversaw the 2020 Economic Survey for Korea released by the Ministry of Economy and Finance, Aug. 11, said price caps should be avoided, unless there is evidence of a monopoly or oligopoly of developers allowing them to extract undue profit.

"I don't know of such evidence in Korea or even Seoul and Gyeonggi Province. Even if monopolistic positions existed, promoting competition would be better than price caps."

The recommendation comes about a month after a government revision to a related law took effect July 29, putting a price cap on apartments in 18 districts in Seoul and three cities in Gyeonggi Province ― privately-owned areas that had been excluded from strict anti-speculation measures for years.

Supply increase matters

A substantial portion ― about one-third ― of the 132,000 homes to be supplied by the government by 2028 will be government-built small apartments that are often socially stigmatized as places for low-income earners, of poor quality and with sub-standard facility maintenance.

Many experts point out the government continues to neglect the fact that people want to live in decent homes in decent areas, a reason they consider the plan a failed real estate policy only jacking up prices, and leading to the prospects of having stable living arrangements for many becoming distant.

The median price of apartments in Seoul has soared by 314 million won ($262,000), or 52 percent, over the past three years. Prices are on a continued, steep rise despite ― or more precisely due to ― the government's two dozen rounds of "botched" real estate policies "designed" to curb property speculation.

This in his view is another clear indication of an imbalance between supply and demand.

Demand is pushed up by low interest rates. Some locations have a limited supply and are particularly popular, mostly because of good amenities including "elite" secondary schools and "hagwons," or cram schools needed for admissions to them, and "prestigious" universities.

"Supply has not followed demand. Although measures aimed at curbing speculation can be useful, alone they are unlikely to curb price increases, as they do not address the fundamental supply-demand imbalance. Property taxes for multiple homeowners should help damp demand and curb speculation," the OECD economist said.

He emphasized that increasing the number of new homes should be the key focus in solving the ongoing problem that has unsettled most Korean's stable living environments.

The focus on housing supply is essential ― a change he says is needed in the government approach given that policies thus far have mainly focused on reducing demand and stemming speculation.

"Reducing the shortage of housing is the only way to sustainably stabilize prices. If policies are properly implemented, they will ease price tensions over time."

Reconstruction therefore has to be a substantial part of the supply response, given the density of Seoul, he stressed, adding that the relaxation of land-use regulations will also benefit private developers, as part of measures to remove obstacles to the expansion of the housing supply.

"Taking into account environmental constraints and infrastructure requirements would help further rebalancing supply and demand."

Yet he added the view that government-built housing is necessarily of poor quality looks to be exaggerated.

"Affordable housing should be part of the solution for low-income families that have difficulty in accessing decent housing through the market. Paying attention to quality, eligibility conditions and limiting segregation is of course essential."

While governments often tend to favor home ownership, a healthy rental market is also important for people who cannot afford to buy or are very mobile, he said.

"Well-developed rental markets have contributed to housing market stability in countries such as Germany and Switzerland."

Punitive taxes

The senior OECD economist advised against frequent changes in property taxation, which could create excessive uncertainty not only for speculators but also long-term investors.

Landlords need visibility on investment returns and taxation. Frequent changes in property taxation in that sense risk discouraging long-term investors.

"This may lower housing prices in the short term if they sell their rented properties. But it will also mean less options for tenants and possibly higher rents and lower quality dwellings for low-income earners. Punitive tax rates should apply only to speculators ― landlords with short owning periods."

Besides the increase in supply, the government should ensure that good public transport connections to the outskirts of Seoul are available to provide more housing options, monitor mortgage growth and use macro-prudential measures to slow it if it becomes excessive.

He said interest rate hikes by the Bank of Korea are not an option, because of low growth and inflation.