[FORUM]Housing price controls backfireShiny new cars just out of the factory easily attract the attention of customers. But as soon as the cars get driven off the lot, they become used cars and their prices fall sharply. Except for antiques, all goods cost the most when they are new ― that’s just common sense.
In Korea, however, apartment prices are always the lowest when they are sold for the first time, when buying the rights to the apartments before construction. That is a result of government controls on apartment prices for the past two decades. It is possible to buy a new apartment and sell it at a higher price after living in it for a few years.
Such a situation stems from a special supply system of selling the rights of an apartment before it is built. Because the apartments are yet to be built, prices are set low. Even if the accruing interest, which the buyer of the apartment has to bear until he actually moves in, is taken into account, the difference between the price and market value becomes great.
As a result, it has been commonly believed that buying the rights to an apartment will automatically yield returns, and so the entire nation believes that it would be impossible to increase wealth without participating in the investment ― or speculation ― in the real estate market.
In the mid-1980s, Harvard Design School professor William Doebele visited Seoul, and he questioned whether Koreans actually want to live in the apartment complexes that resemble military barracks. Line after line of concrete buildings are often seen in communist countries such as the former Soviet Union and East Germany. In the United States and Europe, such housing is not popular, even as rentals for low-income families.
The uniform structures of Korean apartments were chosen by construction firms to build many units as easily and as fast as possible to accommodate the exploding population in cities during the boom times. But government controls on sale prices also influenced design. Construction firms did not have to make an effort to build specially designed apartments because the housing prices had caps. All they had to do was meet minimum conditions by building indistinctive housings.
As time goes by, apartment buildings with commercial facilities, whose prices were not controlled by the government, began to appear in Korea. After the foreign exchange crisis of 1997-98, the limits on the initial sale prices of apartments were lifted. Such changes prompted enormous improvements in the structures and exteriors of apartments. Competition has entered the apartment market, introducing the concept that a well-built apartment can be sold at a higher price.
Economists can hardly agree on anything, but one of the few things they do agree upon is that a government’s attempt to control housing prices negatively affects the supply and quality of housing. Such price controls are “a sure way to destroy a city other than bombing,” according to “Principles of Economics,” by N. Gregory Mankiw.
The economist explained that such efforts to limit housing prices work in the short term, but in the long term, they reduce housing supplies even as demand continues to rise. Such a situation will not only worsen the balance in a housing market, but will also lower the quality of houses, deteriorating the urban environment, Mr. Mankiw said in his book.
As the Korean housing market becomes overheated over the sales of the rights to apartments to be built in Pangyo’s new city, the government mandated that the rights to all 20,000 units would be sold simultaneously at prices set by the government. It was another attempt to dampen housing prices.
But those selected for the rights to buy a Pangyo apartment are surely expected to profit handsomely. It will be strange if investors do not flock to partake in such an opportunity. Everyone will think that he or she can be one of the lucky 20,000. The government unintentionally encouraged real estate speculation by announcing its latest control measure.
Meanwhile, it is uncertain whether the government had ever calmly assessed the consequences of its decision to distribute the luck to 20,000 households. Controlling the price for the new apartments will cut supplies, pulling up housing prices in the long term, as economists have warned. The deteriorating quality of housing will bring about a worse urban environment, as many economists have also said. We wonder if Korea is free from such concerns.
* The writer is an editorial writer of the JoongAng Ilbo.
by Shin Hai-kyung