Korea's real estate policy fiasco

Seoul tops list of apartment price growth among major cities

By Lee Min-hyung

Since his inauguration in May, 2017, President Moon Jae-in and his administration have been waging a war against real estate speculation by employing all possible measures focused on punitive taxation and lending regulations.

With the lofty goal of offering homes to more people at affordable prices, their policy initiatives have been considered to have had good intentions but the attempts have not come to fruition as they defy the basic market principle of supply and demand.

Experts said that if the government continues to focus on suppressing demand without supplying more homes in the capital where most Koreans want to live, it will freeze trading and distort the market, eventually fueling pent-up demand and a further hike in home prices over the long term.

The side effects of the government's ineffective real estate policies are manifested in the latest data comparing apartment prices in major cities around the world.

Apartment prices in Seoul have posted the largest growth for the past three years among those from other mega-cities; a result of the government's "reckless" regulations that have distorted the market.

According to Numbeo, the world's largest cost of living database, apartment prices in downtown Seoul have skyrocketed 56.6 percent over the three-and-a-half years since the end of 2016.

This was the biggest increase, surpassing that from the so-called "superstar" cities ― such as New York, Paris, London, Munich and Tokyo.

As of July 1, the average apartment prices per 3.3 square meters in downtown Seoul came in at 65.5 million won ($54,800), the third largest after city-states, Hong Kong and Singapore, according to the data.

The steep rise in prices here is one of the biggest headaches for the government, as the authorities have failed to stabilize the soaring costs of apartments even after imposing 22 sets of strong real estate regulations over the past three years.

Economists argue that the Moon administration should let go of its "regulation-driven" real estate policies, and stop introducing additional ones focusing on "restraining" demand.

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"The key lies in controlling the supply and demand in a more market-friendly manner," Yonsei University economist Sung Tae-yoon said. "Current real estate policies are going against market principles, so the government should change its years-long approach toward this issue."

The remarks reflect on the government's distorted sets of regulations with the focus on controlling demand by de facto disallowing ordinary citizens to get mortgages. The government has argued such steps were aimed at stabilizing the market against real estate speculators.

But the economist refuted this claim, saying the move has ended up bringing about a boomerang effect on non-homeowners, including those in their 30s and younger.

"The regulations blocked young people with small seed money and those living in a rented apartments from purchasing their own homes," he said. "They fell victim to the real estate policies, and this is not a move in the right direction. The authorities need to consider shifting their approach."

With the apartment prices rising steeply, regulations only amplify the sense of crisis among non-homeowners that they need to purchase apartments before prices go up even further.

The atmosphere has in recent years surfaced across the nation because Seoul apartment prices have jumped every time the government announced new regulations. To make matters worse, the authorities are showing no sign of changing their botched approaches to real estate policy, and only hint at introducing "unceasing" regulations with the blind belief that regulatory measures are the "cure-all" to stabilize the market.

Myongji University professor of real estate Kwon Dae-jung urged the government to follow market logic, and stop seeking to suppress it with regulations.

"Increasing the housing supply in Seoul is the only step the government can take to stabilize the market," he said. "The number of homes to be supplied in the capital will decline to 20,000 in 2021, compared to this year's 41,000."

"If the supply declines and the economy bounces back next year, housing prices will definitely go up," he said. On top of that, massive market liquidity is flowing into the real estate market, raising the possibility over the housing market bubble, Kwon added.

He also said the nation's prolonged low interest rate continues to act as a negative factor in stabilizing the market. The government needs to come up with measures to redirect the liquidity into areas other than real estate.

But the key should lie in expanding the supply of apartments in Seoul, he said. Toward this end, he advised the government to consider easing regulations on the upper story limit for apartment blocks. This does not allow any new apartments to exceed 35 floors.

Despite the previous botched real estate regulations, the land ministry introduced its 22nd set of regulations Friday with the focus on imposing more taxes on owners of multiple homes. But the government did not get down to brass tacks this time ― again ― as the measures have nothing to do with increasing the housing supply and helping non-homeowners.

Gyeonggi Province Governor Lee Jae-myung also criticized the Moon administration for its failure in real estate policies.

"Regulations on loans and housing transactions cannot be a fundamental solution from a longer-term perspective and can only introduce balloon effects," Lee said.

He claimed the government needs to collect more real estate taxes from homeowners' unearned income when making apartment transactions.