Real Estate Regulations That Hurt Buyers: Abolition Is the Answer

“Rent Control Devastates Cities”

“What is the most effective way to devastate a city without war?”

This is a question that the vast majority of economists like to pose in lectures and talks. The answer is rent control. It is also a standard case that never fails to appear in economics textbooks. Because rent control reduces profitability, the supply of rental housing declines, creating a shortage of rental units. As a result, rents end up higher than they would have been without rent control.

Moreover, landlords have no incentive to invest in the maintenance and repair of rental housing, so properties are simply neglected. The quality of rental housing inevitably deteriorates. If rent control policies persist, areas with large concentrations of rental housing ultimately become blighted. Historically, every country that has implemented rent control—including the United States, Germany, France, Sweden, and the United Kingdom—has a common record of failure.

In Korea as well, real estate regulatory policies such as rent regulation, disclosure of apartment construction costs, and price ceilings on presale apartments are continually announced. Most recently, the government revived the price ceiling system for presale apartments on private residential land, which had been in place for seven years from 2007 before being abolished. The government expects that this will help stabilize housing market prices by ensuring presale prices are set at a reasonable level. But such expectations will never be fulfilled.

The fundamental reason these government policies are bound to fail is that they completely ignore the basic principle of economics: supply and demand. When demand increases, prices rise; when demand falls, prices decline. Likewise, when supply increases, prices fall; when supply decreases, prices rise. If real estate regulations such as price ceilings on presale apartments reduce or eliminate corporate profits, supply will naturally decline.

In fact, Korea has already experienced a sharp drop in housing supply after the introduction of price ceilings on private housing presales in 2007. According to Real Estate 114, the supply of private housing, which stood at 229,000 units in 2007, fell to 145,000 units in 2008, 126,000 units in 2009, and 91,000 units in 2010. The outcome of today’s real estate regulatory policies, including price ceilings on presale apartments, will be no different.

When housing supply falls, rising housing prices are an entirely natural phenomenon. Not only the presale prices of new homes but also the prices of existing homes are bound to increase. The government has viewed rising presale prices as driving overall housing price increases and has therefore tried to regulate presale prices through measures such as disclosure of construction costs. But the result has been nothing more and nothing less than so-called “lottery apartments.”

According to the real estate information firm Zigbang, as of July to September this year, the gap in Seoul between the presale price and the market price of newly built apartments less than one year after completion was KRW 370 million. If a price ceiling on presale apartments is added on top of this, the “lottery jackpot” will grow even larger. It may be a windfall for a small number of successful applicants, but the vast majority of other buyers will have no choice but to bear the full burden of reduced supply and the resulting price increases caused by government real estate regulation. In particular, rising real estate prices driven by regulation will attract even more investment-driven demand, further narrowing the opportunities available to genuine homebuyers.

Both in theory and in history, real estate regulation is a failed policy. Korea’s real estate regulatory policies have also been a continuous series of failures. It would be a grave mistake to believe that the current government will somehow be the sole exception. The best policy is to leave matters to the market’s “invisible hand.”

Hyeokcheol Kwon, Vice President, Center for Free Enterprise (CFE)

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Original title: 수요자 울리는 부동산 규제, '철폐'가 답이다

Author: Hyeok-cheol Kwon

Date: 2019-12-12

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=23&idx=22154