The Government’s “Midas Touch in Reverse”: Hands Off the Housing Market

The term “sudden pauper” has become popular. It is a newly coined expression meaning that people who can no longer possibly afford to buy a home by saving their salaries have, in an instant, become paupers because housing prices have risen too fast. During the three years of the Moon Jae-in administration, overall housing prices in Seoul rose 34%, and apartment prices in particular surged 52%. Money that would have been enough to buy a home just 3 or 4 years ago is now not even enough to secure a jeonse lease. As a result, new real estate-related terms such as “this life is over for buying a house” and “subscription abandoners” are appearing almost daily. Following “corona blue,” some people are even complaining of “real estate blue” (real estate depression).

From the beginning of its term, the Moon Jae-in administration announced no fewer than 25 real estate measures, saying it would bring housing prices under control. It defined real estate investment as speculation and even emphasized that “the era of making money from real estate is over.” Specifically, it strengthened taxes on owners of multiple homes and prohibited loans in speculative districts. By introducing measures such as the excess reconstruction gains recapture system and the price ceiling system for pre-sale apartments, it showed a firm determination to block so-called unearned income from real estate.

After repeated real estate policies, half of South Korea has become designated as a real estate speculative zone. Areas subject to adjustment have increased to 111 out of the nation’s 226 cities, counties, and districts. In the past, there were only 37 such areas, including Seoul, Gyeonggi, Busan, and Sejong, but now this has led to a situation in which half the country’s land area, or 70% of the entire population, lives in regulated areas. Yet, as if mocking the government’s intentions, housing prices continue to soar through the roof. The government has repeatedly declared that the real estate market would stabilize, but each time it introduces a new regulation, transactions seem to pause briefly before prices immediately begin rising again. This is the so-called learning effect and balloon effect.

Far from stabilizing the real estate market, the government has long since become a minus hand that only adds to the confusion. It revised the Housing Lease Protection Act to stabilize the jeonse market, allowing tenants who had lived in a home for two years to extend their contract for another two years, while limiting landlords to raising the jeonse deposit by only 5%. The result was failure. Jeonse prices skyrocketed, and “jeonse refugees” and “rent poor” (people who spend most of their income on jeonse deposits because jeonse prices have risen) began to appear in large numbers. Rising jeonse prices pushed up housing prices and became a factor behind the sharp increase in home prices.

Government regulations are also suppressing supply. The introduction of the excess reconstruction gains recapture system and the price ceiling system for pre-sale apartments made large-scale reconstruction and redevelopment in central Seoul impossible. When demand is high but supply is absent, housing prices are bound to rise. This is the result of ignoring the basic law of supply and demand taught at the very beginning of introductory economics.

Meanwhile, as people watch the unstable real estate market, a panic-buying phenomenon has emerged in which buyers “pull together everything they have,” even taking out excessive loans to purchase homes, and housing prices are rising even further. Not only in the Seoul metropolitan area but also in provincial regions, home prices are on a steep upward march.

The government’s one-sided, regulation-centered real estate policy is an even greater problem because it is causing social conflict. By defining real estate investment as “speculation” and demonizing owners of multiple homes, the government has led people without homes to blame landlords for the surge in housing prices. Landlords say they are struggling under increased property holding taxes. Because of the unreasonable jeonse protection law, legal disputes between tenants and landlords have also increased. In fact, after the revision of the Housing Lease Protection Act, the number of jeonse-related disputes surged twentyfold. The side effects of the government’s misguided policies do not end with real estate; they are making our society as a whole sick.

An easy way to calm the chaos in the real estate market is to increase supply. The reason housing prices keep rising is ultimately that demand is high while supply is insufficient. The most effective real estate policy is to supply the kinds of homes people want, in the places they want. People want to live in spacious, pleasant homes located in areas with easy commutes and good educational environments. Supply measures the government has announced so far, including the 2.4 measures, have focused on building new towns on the outskirts of the Seoul metropolitan area or constructing public development projects and public rental housing. As a result, the scarcity of homes in Seoul’s Gangnam area, which has all the desired conditions, has only grown, making price increases inevitable.

Supply must be expanded in ways consumers want, and transactions must be revitalized to stabilize the market and prices. Excessive regulation and tax bombs make people unable even to consider entering into transactions, and a market without transactions cannot possibly be healthy. Real estate policy that runs counter to the principles of the market economy is a “minus hand.”

Eun-kyung Kwak

Head of the Corporate Culture Office

Center for Free Enterprise (CFE)

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Original title: ‘마이너스의 손’ 정부, 부동산시장에서 손을 떼라

Author: Eun-kyung Kwak

Date: 2021-02-24

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=23528