[Market Economy in Your Pocket] Real Estate Problems Must Be Solved Through Market Principles

Housing prices in Korea are high. According to a 2003 survey by the Japan Association of Real Estate Appraisal, housing prices in Seoul were found to be even higher than those in Tokyo, which is famous for its expensive housing. The same is true of all types of real estate, including retail properties, offices, and factories.

The fundamental cause of high housing prices lies in strict land-use regulations. No matter how high urban housing prices rise, converting farmland and forest land into residential land to increase housing supply is nearly impossible. The supply of retail space, schools, factories, and other facilities is all blocked by strict land-use regulations. Even within cities, restrictions such as building height limits and redevelopment regulations prevent an expansion of real estate supply. As economic growth increases demand while regulations block supply expansion, high prices are only natural.

Regulations should be boldly eased so that the supply of housing, retail space, schools, and industrial land can increase. Then housing prices will fall and the public’s standard of housing will improve. Schools for children will also become more spacious. The problem of haphazard development can be addressed through planned new town development and similar measures.

The land currently used for urban purposes amounts to only 5% of the nation’s total territory. Even if people were to live in areas twice as spacious as they do now, 10% would be enough. The remaining 90% of the national territory would still remain farmland, forest land, and rivers. Clearing just 5% of green areas would allow urban land to double in size.

Real estate problems cannot be solved by suppressing speculation. Taxes may lower prices immediately, but when the tax burden is taken into account, consumers’ housing cost burden does not decrease. Rather, new housing construction declines, increasing the real burden of housing costs. Transaction regulations such as the Land Transaction Permit System may have the immediate effect of eliminating the market, but once transactions recover later, prices will rise again. In fact, because this process causes inefficient land use, prices rise even further.

Farmland belongs to farmers, and forest land belongs to its owners. State intervention in land should be strictly limited to cases where each person’s land use harms others. If regulation is imposed even when that is not the case, compensation commensurate with it should follow.

The ultimate solution to real estate problems is to ease regulations and increase supply. Some degree of government intervention is necessary to prevent haphazard development, but that cannot be used as an excuse to restrict supply.

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Original title: [주머니 속의 시장경제] 부동산 문제, 시장원리로 풀어야

Author: Center for Free Enterprise (CFE)

Date: 2005-08-01

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=22&idx=10654