[VIEWPOINT]Change sell-first, build-later policy

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[VIEWPOINT]Change sell-first, build-later policy

There has been a lot of criticism against Seoul Metropolitan City for fanning the rise in housing prices instead of spearheading a drive to stabilize them. That’s because SH Corporation, a subsidiary construction company of the city office, set the sales price of apartments it was building in the Eunpyeong New Town area, northwest of Seoul. Ordinary people, who had to give up the dream of having a home of their own due to high apartment prices in the Pangyo area, must have felt a sense of despondency, sighing, “Seoul city you too.”
It is true that the government has tried to protect the consumer, the weaker player in the market, by strictly regulating illegal collusion among businessmen.
But in the case of the home sales market in particular, the government has failed to do the same. The housing market is far behind in the market economy because the market has continued the system in which homes were sold before construction was completed.
First of all, such a system makes it extremely difficult for consumers to get compensation for damage that occurs after they move into their homes because they have to pay the contract deposit and installments in advance.
Second, if home builders that sell all of the home units under construction cling to the idea of saving on building costs to get maximum profits, their construction work could become untrustworthy. Third, if the home builder goes into bankruptcy, consumers might have to bear most of the damage on their own.
Perhaps we can put them aside as minor problems. But we have to see things from a different angle, when we come to realize that the system of allowing home sales before construction is the main reason apartment prices are high.
In ordinary circumstances, the supply of newly built homes tends to rise when the home market enjoys good business. Since the actual occupation of the homes takes another two to three years, the system of selling housing units before they are built has created a vicious cycle that fans excessive home demand instead of stabilizing the prices.
In the Seoul metropolitan area, where buyers line up to purchase new apartments, the builders raise the prices as they please. This, in turn, psychologically stimulates the prices of existing apartments in the nearby area. If speculative demands add fuel to the situation, applications for the right to purchase new homes will increase drastically, causing the vicious cycle of price increases to be repeated.
If the system of selling homes after construction is completed is implemented, home builders will try to sell the apartments according to the market when they are finished, two to three years after the start of construction.
That system would have the effect of preventing a prolonged stagnation of the home market, because it would stabilize home prices. The number of homes available for occupation increases when the home market is doing well and decreases when the home sales business slows.
In general, businesses try to keep an adequate level of stock by lowering prices, because the financial cost increases when the stock of homes climbs due to slow sales by high price. On the other hand, even if the number of unsold homes increases, the home builders can cling to high sales prices because they feel confident they can lessen the burden from financial costs derived from the increased number of unsold units.
If the market adopts the system of selling only after construction is completed ― instead of the sales-first and construction-later system using interest-free money that builders get in advance from their consumers ― it will become difficult for builders to insist on high sales prices because they face the danger of sluggish home sales.
Oh Se-hoon, the mayor of Seoul, adopted the system of selling homes after they are completed by saying, “Seoul city will sell all public apartments built by the city authorities after 80 percent of the construction work is completed.”
It deserves a hearty welcome, but this writer, who has consistently claimed that the introduction of the sales-later policy is the prerequisite to the normalization of the home sales market, cannot erase an uncomfortable feeling.
It will not be easy for Seoul to lower the sale prices of apartments it builds in Eunpyeong New Town area by introducing the sales-later system, because Seoul city has already permitted the use of expensive interior materials, imposed a low floor-area ratio and paid high levels of compensation to land owners in the Eunpyeong area.
Moreover, for the system of selling homes after construction to have a positive effect on the home market, it needs to be implemented at the same time in both the public and the private sector.
If the sales prices of Eunpyeong New Town apartments do not go down any further, I am concerned that the system of selling homes after construction will be discredited after two to three years.

* The writer is the dean of the College of Economics and Business Administration at Hanyang University. Translation by the JoongAng Daily staff.

by Lim Duck-ho
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