[VIEWPOINT]Supply as the market demandsThe government announced on Wednesday “reform measures of the real estate system to stabilize housing for ordinary people and curb real estate speculation.” There were no absurd measures that surprised the people and we were also relieved that the government handled the expansion of the supply of medium- to large-sized apartments as an important issue, which it had stubbornly refused to consider up to then.
The main measures are to expand the housing supply, to expand the targets of comprehensive real estate taxation, and to increase transfer taxes for owners of more than one house per household through taxation of actual transaction prices. I would like to examine a few complementary measures for real estate policy.
Housing prices have soared over the past few years very differently from the way they did in the late 1980s. At that time, housing prices rose regardless of housing types or regions and whether they were sales or rental transactions, but recently the increase in housing prices has mainly occurred in large-sized apartments in the Gangnam area, southern Seoul. This means that there has been a greater premium on the housing conditions in this area.
Knowingly or unknowingly, more people have wished to live in a good house in a good neighborhood even if they pay 20 million won ($19,000) per pyeong (3.3 square meters). In this situation, no matter how many small-sized units are built, housing prices in Gangnam cannot be stabilized. Many experts think this is the reason for the failure of the project to build a new city in Pangyo in the suburbs of Seoul.
The government made a good decision to build a large number of medium- and large-sized units in locations and with housing conditions comparable to Gangnam. Bearing in mind that housing prices in Gangnam reflect an overall assessment of conditions, the government should make an effort to promptly provide a high-quality urban environment, including education.
As the contents of the tax measures have been revealed little by little in advance, the people have developed a tolerance to a certain degree and the legislation of these measures is unlikely to be difficult. There has also been a consensus in the academic community on the basic policy direction of increasing property taxes, decreasing transfer taxes and enhancing the effectiveness of capital gains taxes by imposing taxes on actual transaction prices.
But we are concerned that the increased taxation on real estate would make the distribution of resources between the private and public sectors tilt toward the government. As the government changed the tax system to one that penalizes rich owners of real estate without considering the principle of tax revenue neutrality, the overall tax burden has grown. Furthermore, it is trying to make some regions and classes enjoy vested interests from these taxes through the mechanism of tax revenue distribution.
The government should have asked the consent of the people on whether our country should have a “bigger government” than now, whether taxation on the possession of real estate is the right policy means for income redistribution and what additional services the government will provide in return for collecting more taxes. The experience of advanced countries says that the bigger the government becomes, the slower economic growth becomes.
Will housing prices actually go down, will housing for the average citizen be stabilized, and will the growth potential of the entire economy be expanded, as the deputy prime minister contends? Because capital gains from real estate decrease if taxes are increased, in the short term the value of owning real estate will decline and housing prices will drop. But in the long-term, the prospects of the policy effect are not optimistic.
Unless there is adequate supply to meet demand, prices will rise, no matter how high the taxes are. Since the increase in property and transfer taxes will shrink the housing supply, we are worried about price increases on a long-term basis.
There is a kind of superstition that if 1 percent property and capital gains taxes are imposed, speculation will be controlled and housing prices will be stabilized, but even in big cities in the United States that impose that level of property taxes, real estate prices have risen uncontrollably for the past few years.
More fundamentally, policymakers should get away from the perception that speculation increases real estate prices. Speculation is the result or process of price increases, not the cause. In the late 1980s, owners of idle land were the targets of attack, and at present owners of more than one house per household are. If all people have only one house per household, however, from whom will ordinary people who cannot afford to buy a house rent one?
Rather than ascribing the responsibility to “speculation” whose meaning is unclear, the shortcut to housing stability is to supply the quantity and quality of housing the market wants.
* The writer is a professor of real estate at Konkuk University. Translation by the JoongAng Daily staff.
by Son Jae-young