Prudence is needed

South Korea has expanded caps on preconstruction apartment sales prices — which currently restricted to public land — to private land as a preemptive measure to clamp down on housing prices that have been on the rise in some southern districts in Seoul. The government has revised the housing act to enable flexibility in new apartment offerings. The cap can be applied to locations designated as “overheated speculative” zones — instead of the previously stricter definition — as housing prices in some areas have jumped by more than twice the gains in consumer prices in the past three months.

Under the new definition, the entirety of Seoul, plus 30 locations across Gyeonggi, Sejong City and popular Suseong District in Daegu could face a price cap on new apartments. The apartment complexes or neighborhoods already cleared for reconstruction or redevelopment could be partly affected through retroactive application. The ban on reselling will also be extended to five to 10 years from the current three to four years.

The cap is a direct price intervention which could cause a huge backlash in the future. Apartment prices in the neighborhoods of southern Seoul’s Gangnam have picked up since July after staying subdued since last September. The demand for reconstruction sites has spilled over to other areas. Housing prices have become unimaginable for salaried workers, even those with savings. The starting prices of new apartments also have pushed up home values. Prices of new apartment offerings in Seoul jumped 21.02 percent in a year. The government has stepped in to ease the gap.

But price intervention is bound to generate side effects in the longer run. First of all, supplies will decline. The returns for builders and landlords will become smaller if offering prices are capped. Builders and landlords will put off construction if they cannot make more money. The prices of new offering can come down 20 to 30 percent in the near-term, but overall housing prices could jump due to lack of supplies.

The price cap was hardly used after several introductions since 1977 due to the side effects. The cap also could fan prices of new housing supplies available in the market. The policy could end up failing to rein in prices at the end of the day. The government may have to resort to new regulation to compensate for its failures in housing policy. Authorities must think twice before resorting to price interventionist action.

JoongAng Ilbo, Aug. 13, Page 30