Contribution Enhancing efficiency of public rental housing in Korea

Government asked to encourage private sector to engage in public rental housing program

By Koo Kang-mo

Providing a basic living environment to needy people is one of the social services of most governments.

Amongst essential services is the provision of housing to marginalized people. This type of housing is identified as social housing, public housing or other terms depending on region

Whatever you call it, the goal of social housing plans is quite clear. Regardless of income level, people need shelter to maintain a stable life at an affordable cost.

According to a few papers related to public housing rental schemes both domestically and globally, there seem to be a few channels that can enhance the efficiency of such plans in Korea. Among the possible solutions that can alleviate the current issues related to public rental houses, I would like to focus on two: variation of housing types, and the involvement of the private and non-profit sector.

The OECD reported a status quo in social or public housing conditions in OECD members and other European countries. It is not surprising that the proportion of social housing to total housing in each country varies widely from zero percent to 34.1 percent with an average of 6.9 percent in OECD member countries and 7.5 percent in EU members.

Koo Kang-mo

According to the 2018 statistics released by the OECD, Korea stands in ninth position with public rental housing accounting for 8.9 percent of total rental housing. In a sense, the Korean government has successfully pursued the goal of reaching the OECD average in terms of public rental housing provision. On the other hand, surprising news came to bear recently when the 2020 annual report of the Land, Infrastructure and Transport Committee was released.

The annual report states the provision of public rental housing increased from 172,000 units in 2018 to 181,000 units in 2020 with the projected supply of 187,500 units in 2022. While it is a plausible result to provide more affordable rental units in the market, it is not easy to accept the higher-than-anticipated figure of vacancy rate, which remains in the low double digit percentile range.

In the same paper, it was reported that the vacancy rate of public rental houses provided in 2020 was 16.6 percent. This figure is an obvious sign of mismanagement of the existing units and a mis-estimation on the demand side. Especially, a breakdown of vacancy rate by unit size in “Haeng-bok” rental housing, a sub-sector of LH's public rental housing scheme targeting young people aged between 19 and 39, indicates the mismatch of supply and demand in public housing strategy.

On average, the vacancy rate of Haeng-bok rental housing was 8 percent. While the vacancy rate of larger units (40-50 square meters) was merely 2 percent, 12.5 percent of the smallest units, ranging from 10 to 20 square meters, remained vacant for over 6 months. Even after considering the population change with an increase of lone households and smaller household size, the vacancy rate at double-digit level seems to be higher than expected.

To lower the vacancy rate and enhance the efficiency of public housing, the provision of a good balance of unit types can be of help. The size of 85 square meters of net usable area has been the norm in the standardization of Korean living space.

This yard stick is applied in various area, including the tax system, building code, and financial benefit for construction financing. In a similar manner, the most spacious unit type among public housing here is generally capped at 84 square meters. To accommodate larger families, especially with 3 generations or two or more children in the same household, exceptional consideration needs to be given, at least to some extent.

Another means to enhance the efficiency and efficacy of the public rental housing scheme is to encourage the private sector to engage in the public rental housing program. The countries well-known for higher proportion of public rental housing, such as the Netherlands, Austria, Denmark, and the UK, provide public rental housing mainly through non-national authorities.

In Korea's case, 68 percent of public rental houses are provided by the national authorities or public agencies and this number is fifth-highest among the OECD countries. In contrast, 79 percent of the Dutch public housing and 62 percent of the UK's public housing is provided by non- or limited-profit providers.

Furthermore, it is known that LH has been in deficit by over 1.2 billion dollars and it is hard to expect to find any financial improvement with the current vacancy rate and the initiation of new projects which have upfront costs.

It needs to be noted that regional and municipal authorities, throughout the OECD and European countries, account for about half of all social housing provision, and 14 percent of the supply is from national governments. By decentralizing the social housing provision, public housing renters can enjoy a variety of choices with different types and sizes of units and lessen the financial burden of the central government or agencies.

To fulfill the needs from the demand side and lessen the burden of the deficit of the government and government agencies, diversifying unit sizes and types to accommodate people in a variety of situations and inviting private or non-profit organization to the social housing program can be of help to enhance the efficiency of the program in Korea.

The writer is a researcher at Hana Institute of Finance.