[VIEWPOINT]New policy will boost housing prices

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[VIEWPOINT]New policy will boost housing prices

Seoul’s city government announced a plan to implement a new after-construction sale system for all public apartments provided by the city following the controversy over the high sales prices of the new town apartments in Eunpyeong District. However, because the problems related to housing construction are due to a complicated interaction of many different factors that affect supply and demand in the market, they cannot be solved by one or two radical measures.
The government proclaimed that “speculative investment in real estate was over” when it raised taxes on real estate much higher, but small and large problems are still appearing. The after-construction sale policy cannot be a panacea that will lower sales prices, prevent speculative investments, recapture development profits and even stabilize existing housing prices.
As a matter of fact, the after-construction sales will raise the prices of apartments. The current pre-construction sale is part of a business transaction in which the consumer buys a house at a discounted price with a minimum interest burden in return for loaning money to the construction company. If the margin of discount was not sufficient, consumers probably would not apply for the right to buy a house before it was built. The reason there is such heated competition to buy new housing units before they are built despite the high sales prices is because their sales prices are still lower than the market prices of existing ones. The market for pre-constructed housing units is more diverse. Existing apartments play the role of substitute goods to new apartments on sale before construction.
Under the pre-construction sale policy, the margin of the discount of the sales price is larger than the interest borne by the consumers. This is because the construction companies do not have to worry whether the housing units will be sold when they are completed, because they have been sold. In other words, a pre-construction sale is a situation in which the risk of the construction project is shared between the consumer and the supplier. The consumers are paid back with financial profit in return for taking the risk of buying a home before it is built.
The adoption of an after-construction sale policy will mean the end of such discounts. There is no reason to sell the apartments at a lower price than those of existing ones in the neighborhood, if people can move into them in a few months time. The selling price of apartments will be decided by the standards used in estimating the market price of existing ones, such as the characteristics of the neighborhood, quality of building materials used and the design of its floor plan. The standards of the new apartments will be higher than the old ones, because they will reflect the existing standards. After all, it is natural that new products should be more expensive than older ones. Ultimately, consumers will have to pay a proper price for something new in return for not taking the risk.
If a policy designed to control the sales prices is implemented at the same time as the after-construction sales policy, as the Seoul city government plans to do, the over-heated housing market will get worse than it was under the pre-construction sale policy. Who wouldn’t seek to buy an apartment if the price of a newly built apartment was markedly lower than the market price? I have no doubt the after-construction policy will ultimately bring about even fiercer speculative investments.
On the other hand, construction companies will have no choice but to depend on loans from financial companies during the construction period. Since financial institutions either levy high interest rates on medium to small construction companies, or try not to loan money to them at all. There is a high possibility that the whole housing industry will be restructured in a way that centers on a few large companies. This will also cause selling prices to rise, and the scope of consumer choices will shrink even further.
Although the after-construction sale provides another reason for the sales prices to rise, since risks involved in the construction are solely born by the supplier, this is a secondary problem. The suppliers, including building companies and financial institutions, will have to bear all the risks involved in the business cycle of the housing market, the choice of the construction site and the planning and construction of apartments, which will make them far more conservative than they are now. If an attitude, “We will not build unless we are sure to make a profit,” becomes the norm, the market’s overall supply will be restricted and this will cause a rise in prices. The housing market is no exception to the rule that prices rise if supplies decrease.
Pre-construction sales have both merits and demerits. Banning this type of sale and forcing everyone to sell after construction will unecessarily restrict freedoms. It is a big disappointment to see that even the local government, which has a mayor from a conservative party, adds absurd ideas to the policy failures of the central government. It is a bigger problem if the after-construction sale system is implemented for the political purpose of avoiding the demand to make public the details of the building costs of apartments.

* The writer is a professor of real estate studies at Konkuk University. Translation by the JoongAng Daily staff.

by Son Jae-young
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