[VIEWPOINT]Meet rich people’s real needs

The government says it is preparing measures “stronger than the constitution” to deal with real estate speculation. These measures are intended to curb skyrocketing apartment prices in certain parts of Seoul, like Gangnam and Bundang, and cool down overheated speculative investment in provincial areas with large development projects.
Excessive real estate speculation is not good for the management of the national economy. There is a need to establish a safety device that will protect the economy from speculation. However, I think it is important to discern rich people from speculators if the government’s proposal are to have any effect.
In a capitalist society, as the economy develops, the number of rich people increases. The government’s plan to move the administrative capital from Seoul to other regions can also be understood as an effort to create an environment that can produce more wealthy people in the provinces. Although economic growth has been slowing down recently, newly rich people emerge continuously.
When people become rich, they want to spend profusely and live in nice, big houses. It is apparent that the apartment price increase in the area south of the Han River is due in part to this demand. The price of small apartments didn’t rise much, but the price of medium to large apartments, which rich people prefer, rose noticeably.
Real estate speculation usually occurs amid this kinds of demand. Speculators buy apartments whose prices are expected to shoot up, and they even buy and sell properties among themselves, raising their prices further.
According to National Tax Service statistics, more than 60 percent of Gangnam apartments that changed hands since 2000 were bought and sold by people who already own three or more houses. This shows that speculative buying had a lot to do with the rise of apartment prices in recent years.
Therefore, in order to stabilize the price of apartments, we need a two-pronged policy that will meet the demands of rich people and prevent the false demand of speculative buyers from rising at the same time.
Previous administrations believed that speculation would disappear if the supply of housing increased, so their real estate policies were focused on the supply side of the market.
Of course, there was also a measure to impose a heavy transfer tax to restrain speculators, but this eventually had no effect as the number of multiple-home owners rose ― these people were not afraid of transfer tax increases.
But the current government seems to be negligent of what people actually need, instead focusing on how to handle the inflated demand created by speculators.
Unlike land, the supply of houses is not limited. Even the prices of the top-flight apartments will fall if more of them are built. We need to fully understand the character of real demand and make sure that there is enough supply to meet it.
If we stop the supply because of the fear that rich people will become even richer from redevelopment plans, real estate speculation will intensify even more. Also, there is no way to stop prices from rising in certain areas because of an increase in actual demand. There is no clever plan that will make the real estate prices in Manhattan in New York or Beverly Hills in Los Angeles drop to a point where anyone could buy a place there.
I think that a differentiated real estate tax increase will be more effective than the transfer tax increase in restraining the demand of speculative buyers. Speculators will flock together to buy, despite transfer taxes, if they expect great profits.
If transfer taxes are raised further, however, it will cause sellers to take their properties off the market. A real estate tax is more effective if it makes it more difficult for people to buy and own multiple houses for speculation purposes.
On the other hand, raising real estate taxes all at once can be seen as a punishment for the rich. It can also lump rich people who own one or two expensive houses in the same category as speculative buyers. The current government also has a past record of failing to raise real estate taxes because of protests from local autonomous organizations.
However, if real estate taxes are raised only in limited areas and for those who own two or three or more houses for speculative purposes, there surely will not be much protest from local governments or residents. We already have a discriminatory owner’s tax for cars. There is no reason why we should not have one for houses.
Of course, there might be various issues that will need to be solved in order to come up with a detailed policy alternative to prevent speculators from inflating demand while meeting the real demand of rich people. Nevertheless, if the government can get a consensus from the public, new measures can be easily established within the boundaries of the current legal system. There is truly no need to make an effort to come up with a solution that is “stronger than the constitution.”

* The writer is a professor of economics at the National University of Singapore. Translation by the JoongAng Daily staff.

by Shin Jang-sup