We Must Change the Monopoly Structure of the Housing Guarantee Business

A single company maintains a monopoly over the various guarantee services related to housing. That monopoly firm is the Housing & Urban Guarantee Corporation (HUG), a public enterprise under the Ministry of Land, Infrastructure and Transport.

From the government’s perspective, having one company institutionally monopolize sale-in-lots guarantees may offer administrative convenience, but the side effects and harm caused by this arrangement are far too great. Allowing another company to provide services in this field would reduce consumer harm and increase social benefits.

As of the end of 2019, HUG’s outstanding guarantees totaled KRW 410.7724 trillion. Of that, sale-in-lots guarantees amounted to KRW 184.2343 trillion. This is a very large scale. The reason HUG monopolizes this guarantee service is that the Ministry of Land, Infrastructure and Transport has not designated any other company capable of providing it. The authorities could permit firms other than HUG, but by turning away from that option, they are effectively granting HUG a monopoly.

There are many problems arising from the government’s guarantee of HUG’s monopoly status. First, despite enormous profits from guarantee fees, its monopoly makes it difficult to lower those fees. Second, government authorities are using guarantees as a convenient administrative means of controlling sale prices. Third, the amount guaranteed has become so large that it is approaching 50 times the company’s capital—the limit on guarantees relative to capital—leaving it exposed to soundness risks. As a result, the risks associated with guarantee services are growing.

Out of concern over this situation, the Korea Fair Trade Commission had already presented, as a regulatory reform task, the need to allow multiple operators in the housing guarantee business by 2020.

The government also acknowledges that HUG’s monopoly profits have led to higher guarantee fees and, in turn, higher housing sale prices. Accordingly, the Ministry of Land is considering additionally designating guarantee insurance companies as institutions authorized to carry out housing sale-in-lots guarantee operations by 2020.

Even so, selecting just one more operator besides HUG would not completely eliminate the harmful effects of monopoly. Additional measures are needed. If the two firms remain under administrative control, the possibility of government-directed collusion would still remain. In other words, it is necessary to allow overseas firms to provide related services as well, thereby increasing the possibility of genuine competition.

HUG is bound to face limitations in its operation as a public enterprise. Therefore, in order to ensure management that is more faithful to market functions, operating guidelines centered on commercial principles need to be established.

First, institutional privileges in funding procurement must be blocked in order to maintain soundness and prevent market distortion. In addition, principles of managerial accountability must be secured so that reckless guarantees do not result in non-performing loans.

The government needs to end HUG’s monopoly as soon as possible so that the real estate presale market can function smoothly. It must take into account the fact that housing costs have been rising for years and that the presale market has been contracting. If so, now is precisely the time when institutional reform is urgently needed to improve consumer welfare.

Sung-no Choi, President, Center for Free Enterprise (CFE)

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Original title: 주택보증사업 독점 구조 바꿔야

Author: Sung-no Choi

Date: 2020-09-10

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=19&idx=23065