[OUTLOOK]Resolving the housing problem

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[OUTLOOK]Resolving the housing problem

Amid the controversy over the disclosure of costs for building apartments, President Roh Moo-hyun said that such disclosure does not correspond to the principles of a market economy. He is absolutely right. But because readers may find it difficult to understand why this is so, I’d like to give a basic explanation.
The sales price of an apartment reflects supply and demand. But there are two kinds of demand: one is the actual demand of people who need housing, and the other is speculative demand. The price of the land that apartment builders purchase varies tremendously depending on its location, which also reflects the market value. But builders construct apartments in areas where apartments are likely to sell easily, and mainly compete in terms of quality and price. So apartments are built where they are necessary and quality improves day by day.
When demand greatly exceeds supply and apartment prices rise, suppliers try to build more apartments. Korea National Housing Corp., a state-run company, can also build more low-income rental apartments when profits increase. But there are three problems here.
First, a sharp rise in housing prices will increase the burden on the actual consumers. Second, to whom will profits that exceed costs be returned? Because builders have already set a sales price when they invite proposals, the marginal profits from reselling apartments largely go to speculators. Third, there are the pitfalls of speculative demand itself. The situation cannot last long when speculative demand is greater than actual demand. A shortage of residents, a drop in prices, a recession in the construction industry and a rise in insolvency will follow.
The way to stabilize apartment prices is, above all, to remove speculative demand. The method should follow the principles of a market economy. In other words, the real estate market, including the land, should be institutionalized and real estate transactions should be put up for auction.
If the awarded price exceeds the estimated or proposed price suppliers declared, the difference should be absorbed as taxes to be paid into the rental housing construction funds. Because incentives for speculation disappear, speculative demand will be reduced and the rise in real estate prices will be checked.
The argument for the disclosure of costs seems to have wrongly identified the problems. First of all, the purpose of asking for the cost disclosure is to control apartment prices, but this is to leave the price decision to the judgment of a few persons, not to the market. If the costs for building apartments are disclosed, supply will shrink and having one’s own house will become more difficult.
As long as demand exceeds supply, a speculator who buys an apartment will try to gain profits by reselling the apartment at a higher price, and a person who buys the apartment will have to pay the high price. If supply decreases due to price controls, rising apartment prices cannot be stopped.
Some argue that costs should be made public for the transparency of management. But there are times when disclosure is necessary and other times when it is not. Hadn’t the Korean Teachers and Educational Workers Union once persisted in its opposition to the disclosure of students’ academic .records through electronic networks? If businesses have to disclose their technology or business secrets, conditions for competition cannot be established.
In conclusion, the best policy is to remove speculative demand, not to impede supply, and if excessive profits occur, to turn them over to the treasury and invest in rental housing construction.

* The writer is a former prime minister. Translation by the JoongAng Daily staff.


by Nam Duck-woo
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