Korea exports knowhow on housing urban mass

Apartment complexes in Goyang, Gyeonggi Province, are shown in this April 11 file photo. Korea’s success is mainly thanks to the government’s bold housing policies, which ultimately resulted in an aggressive public supply of new building lots and housing units. Korea has become a major exporter of high-rise apartment units and knowhow on housing the urban mass.

/ Korea Times

By Kim Sun-woong
Visiting senior research fellow
Korea Research Institute of Human Settlement

More than 80 percent of the Korean population now lives in urban areas. Approximately 24 million people reside in metropolitan Seoul within a radius of about 30 kilometers. This primary city provides shelter to about one half of the whole nation. Excluding city-states such as Singapore, Korea is one of the most, if not the most, urbanized, densely populated, and concentrated nations in the world.

Korea's high rate of urbanization and concentration is a natural consequence of the fact that more than 70 percent of the country's relatively small territory is mountainous unsuitable for urban development. Despite the lack of arable land, Korea was basically an agricultural nation only 50 year ago. Following the Korean War, more than two thirds of employment was in agriculture, and three out of four Koreans lived in the countryside. Back then the population of Seoul was only 1.5 million people, out of 20 million in the nation as a whole.

Rapid industrialization and successful economic growth drastically altered the physical landscape of the nation. Massive rural-to-urban migration took place as the industrial structure moved toward manufacturing and services industries. The high rate of population growth created a serious public policy challenge common in many developing nations. How to house the ballooning urban population?

Despite the rapid urbanization, Korean's transition to city life has been relatively successful. The number of housing units per person doubled from 0.14 in 1970 to 0.28 in 2005. The homeownership rate is over 60 percent, comparable to many other developed nations.

Moreover, housing quality in terms of space and amenities has improved drastically over the years. Korea's successful experience in the rapid urbanization may provide a few valuable lessons to developing countries.

Urban development and housing are a difficult issue to deal with for many developing countries. Economic development without accompanying successful urban development creates low quality of living with polluted, unhealthy and dense urban settlements. Massive investment demand for new urban infrastructure siphons off resources from industrial capital accumulation. As is well-known, the price of land is determined mostly by the potential best use of it. Consequently, it appreciates ahead of the actual economic growth making reactive urban development expensive. In already built-up areas, new supply of urban land is scarce because of the difficulty in coordinating the development of existing buildings and lots. Therefore, the market is likely to have a perpetual shortage of developable lots.

Bold housing policy

In short, Korea's success is mainly thanks to the government's bold housing policies, which ultimately resulted in aggressive public supply of new building lots and housing units. Along with the massive supply, the Korean government intervened in the market with strong price control, regulation and taxation. The pervasive market intervention has been a two-edged sword. On one hand, it enabled the government to achieve its short-term policy goals effectively with moderate costs. It also created many undesirable outcomes resulting in a perpetual cat-and-mouse game between the government and market manipulators.

During the early 1960s, Korea made a strategic choice to channel domestic savings and foreign borrowings to investment in industrial capital as part of its development strategy. The Park Chung-hee administration (1961-1979) viewed urbanization as an undesirable by-product of industrialization. Park tried to suppress it as much as possible. Housing investment during the 1960s and 1970s was less than 2 percent of GDP. A major rural development policy, named, the Saemaeul Undong (meaning new village movement) was launched in 1970 in order to discourage rural-to-urban migration.

In 1971-72, more than 400 square kilometers (about 4 percent of the total landmass of Korea) were declared as greenbelts around Seoul and 13 other major cities. The greenbelt is a ring-shaped area at the fringe of the built-up area in which new urban development is severely restricted.

Housing finance was also quite limited. Mortgages were only provided through a specialized bank, which operated the National Housing Fund established in 1973 which generated its equity mainly through the government-sponsored lottery. Lack of capital provision in the formal housing finance sector and the government policy penalizing the ownership of more than one housing unit popularized an indigenous housing finance mechanism called the jeonse system, a leased housing system based on deposit money.

Despite the draconian measures of restricting urban development, urban concentration continued through the 1960s and 1970s. For centuries, Korea has had a strong central government, and the modern developmental state that started in the early 1960s exerted even stronger power on the economy in public and private resource allocations. Under such a centralized political system, the continuing industrialization made the concentration of population and economic activity inevitable. Consequently, the pent-up demand for urban housing under the restrictive spatial policy generated immense pressure so that the governments had to respond.

Before 1980, most of the new urban lots were supplied through the mechanism called "land adjustment projects." Under this, all owners of the land in a certain area first need to agree in redeveloping their property as a whole. After the redevelopment, they were allocated new lots. A fixed portion of the land of each owner is taken away by the developer. The developer, public or private, then sells it in order to recover the cost of the development. This method does not require a great deal of investment by the developer, but a long development time because of the difficulty in coordinating diverse interests among landowners.

In 1981, the government passed a sweeping law in order to increase the supply of urban land. Under the Building Lot Development Promotion Act, if the government designated a certain area as a development district, all properties would be subject to eminent domain, even though much of the developed land would eventually be sold to private developers. Such a powerful eminent domain authority gave KLC (Korea Land Corporation) and other public developers a great deal of leverage in speedy urban development.

Under this authority, the KLC, KHC (Korea Housing Corporation) and local governments supplied total of 700 square kilometers of new urban land between 1981 and 2008. KLC supplied 53 percent and KHC 20 percent of the total.

A major urban development occurred when President Roh Tae-Woo administration (1988-93) started "the 2 Million Housing Unit Construction Drive." As the number of total housing units then was less than eight million in 1988, the plan was indeed quite ambitious.

Between 1989 and 1996, five major new towns with the planned housing units ranging from 40,000 to 100,000 each just outside of the Seoul's greenbelt were constructed. The proportion of housing capital investment in GDP jumped to around 7-9 percent per year. KLC and KHC coordinated the large-scale planning and massive mobilization of public and private resources. The two corporations merged into the Korea Land and Housing Corporation (LH) in 2009 under the Lee Myung-bak administration with the aim of raising efficiency among public institutions. The construction frenzy continued until the Asian financial crisis reached Korea in 1998. The average number of new housing units supplied between 1990 and 1997 was about 650,000 units per year. More than 75 percent of those new units is high-rise-multi-family units called "aparts" (from apartment).

In addition to the massive construction of housing units, the plan also contained transportation networks, including roads and subway extensions, parks, regional heating system, and other urban public infrastructure. While the massive mobilization of construction resources created undesirable side-effects such as the increase of construction costs and shabby construction quality, the coordinated large-scale planning successfully supplied large stock of new urban lots and housing units in an unprecedented short time period.

Massive supply of new housing

The massive supply of new housing provided many households with an opportunity of new homeownership. As the new housing units were sold below market prices set by the government, homeownership was a quick-and-sure way of building household wealth.

As the price control was based on unit floor space, private developers favored medium to large units. This distorted the composition of housing supply. The government made an effort to restrict the windfall profit through such measures such as high capital gains tax rate. Priority was given to the households that do not own homes in buying new units. The government restricted the sale of units within a specific period. The highly regulated housing market created a perpetual cat-and-mouse game between the government regulators and speculative public.

The slow construction during the Asian financial crisis of 1997-1999 reversed in the early 2000s although the rate of annual supply of new housing was not as high as before the crisis, ranging around 500,000 units per year. As less land is available for the large-scale development, new development sites tend to be on the outer fringes of the Seoul metro area as well as other major provincial cities.

As housing conditions for middle classes improved considerably, the main policy challenge became how to improve housing quality for low-income households. Local governments as well as the central government pushes hard to increase the supply of public rental housing and long-term joense units for them.

The government aims to supply 1.5 million new housing units for low income households between 2009 and 2018. As the supply-side policy alone may not able to provide satisfactory policy outcomes, the government also considers the introduction of a direct subsidy to poor households such as housing voucher.

Housing welfare programs tend to be expensive, and generate substantial market distortion in the labor market as well as in the housing market. Consequently, careful coordination with other income supporting policies needs to be considered.

‘Jeonse’ is a unique home rental system
Jeonse is a unique housing tenure system in Korea. It is a rental, but the renter pays no monthly payment, as often seen in other countries. Instead, the renter deposits a substantial amount as "key money," which will be returned to the renter at the end of the lease in its entirety. The implied interest of the key money can be regarded as the rent. In a typical jeonse contract for a housing unit, the amount of key money ranges from 30 percent to 70 percent of the market price of the unit.

Under the restrictive consumer finance market, jeonse provides an effective way to borrow money with the housing as collateral. Its disadvantage for the owner is to relinquish the use of the property temporarily. It enables the renter to use a larger housing unit than buying it particularly in an environment where housing price appreciates rapidly. While it requires a substantial deposit, it is an equity investment for future housing. In the primitive legal environment in which renter's deposit cannot be securely escrowed, jeonse is relatively safe because the renter physically occupies the property.

Jeonse remained popular even when the formal finance system is greatly expanded to consumer and housing sector since the 1997-98 Asian economic crisis. About 60 percent of rental agreements is made through Jeonse, even though the government tried very hard to increase the supply of monthly rentals over the years. Due to its continuing popularity, banks started a new loan product that uses jeonse deposit as collateral. The government gives subsidy to jeonse renters as it is more widely used for low income households.

Condominium confused as ‘apart’ here
The large-scale-high-density land/housing development resulted in ubiquitous high-rise residential buildings in Korea, commonly called "apart." The owner of an "apart" owns the interior of the unit and a share of the lot. They are actually condominiums in buildings between 15- and 60-story high that contain 200-500 units. An "apart" complex has typically 5-50 such buildings, sometimes with conspicuous names such as "castle," "park," "palace" or "mansion."

While their big match-box like physical shape may not look attractive to many, they do house millions of people comfortably and economically. According to the 2005 Census, 53 percent of housing units in Korea (more than 70 percent in some cities) are "apart." Since about 85 percent of new housing constructions are in the form of "apart," the proportion is increasing. As in other countries, most of Korean household wealth is in the form of housing, and consequently in "apart."

The large-scale-high-density construction does have certain advantages. In addition to saving time and cost in construction, it has low maintenance cost (such as heating and refuse collection) and better security. Millions of people get used to its convenient urban life, and "apart" life is now for all classes of people. As Korean society becomes more affluent, "aparts" are becoming more luxurious with better interior material, more outdoor open space, and underground parking facilities. It has more a communal life style than the single family neighborhood. For example, the "apart" complex has a common day for collecting recyclables as well as open farmer's stands.