Havoc on the housing market

To curb a steep rise in lump-sum jeonse housing costs, the Seoul city government recently introduced countermeasures. The plan is to raise the floor area ratio, or how much floor space can be built on a plot of land of a certain size, by 20 percent. But that change will not have an immediate impact, because its effects will appear two years from now at the earliest.

Market watchers say both the city government and the central government are responsible for the steep hike in jeonse prices.

Jeonse costs in Seoul and other metropolitan areas have risen by tens of millions of won (tens of thousands of dollars) on average due in part to a supply shortage caused by government-initiated town developments and housing reconstruction projects.

The government announcements forced residents living in designated redevelopment areas to search for new homes. As a result, jeonse prices in neighboring areas shot up.

The governments overlooked the important axiom that it takes at least two to three years to supply new housing and instead focused on expanding redevelopment and new housing projects.

Housing supply can’t be increased immediately, and there is no magic bullet to stabilize soaring rental prices. The government has two options to tame jeonse inflation: First, reschedule the timing of demolition or reconstruction to ease housing shortages, and second, revise related housing regulations and recognize small and midsized “officetels” as residences by allowing them to have floor heating systems - which is currently prohibited.

The increases in housing supply set in motion will bear fruit in the next two or three years, according to central government plans. But the Seoul city government’s recent announcement of new redevelopment projects has intensified the already serious housing shortage.

Meanwhile, the central government is set to provide 320,000 public apartments in the metropolitan area by 2012.

Add the Seoul city government’s plans to build over 200,000 small and midsized apartments to that, and oversupply might trigger a significant plunge in domestic housing prices in the next two to three years. The city government’s measures to increase housing capacity could also provoke reckless development by construction companies.

Both the central government and the Seoul city government need to coordinate their policies on housing supply. The focus on just easing housing prices is problematic, and the governments need to look ahead to what will happen within the next two to three years if they go ahead with their plans.