[OUTLOOK]New measures can steady the pricesLast year, housing prices increased by the largest amount since the participatory administration entered office. According to statistics released by Kookmin Bank, housing prices in the country increased 11.6 percent. Housing prices in the Seoul metropolitan area surged by 20.3 percent, and those in Seoul went up by 18.9 percent, the report said. Housing prices in areas outside the metropolitan area went up by less than 4 percent, except in Ulsan Metropolitan city.
The surge in housing prices started in the “bubble seven” areas. The term was coined by the government to indicate seven areas where housing prices surged more than most. Such surges spread into the Seoul metropolitan area, worsening a polarization between the metropolitan area and other areas.
President Roh Moo-hyun promised to have housing prices under control for sure in his New Year’s message. The minister of construction and transportation released his plan for regulations to limit the prices of initial sales of apartment units. Under the new regulations, the prices of initial sales for apartment units larger than 85 square meters will be lowered to 80 percent of their market prices. As controversy erupted over the high prices of initial sales of apartments in the Eunpyeong district in Seoul, Seoul city also announced its plans to put limits on the prices for initial sales and to increase the supply of houses for long-term lease.
So far, politicians have suggested a variety of measures to offer more alternatives for working-class people who do not own houses yet. The measures include special apartments that people can buy for lower prices on the condition that they will resell them to certain public bodies. Another measure is to separate the ownership of land from the ownership of apartments.
The administration and lawmakers are trying to control new apartments in a bid to stabilize the prices of all houses. But among all housing units in the country, new units account for merely 3 percent. Among these, apartment units, which are the object of such regulations, take up only half. Besides, construction on them hasn’t been completed yet. People can only move to those new apartments in a couple of years. Thus, there are limitations to an attempt to stabilize housing prices by putting regulations on new apartment units.
In fact, the regulations are likely to bring side effects. As apartment units will be sold for less than their market value, premiums might be added or speculators might flock to buy the new units.
The essential problem is that politicians have made housing prices a political issue. When enforcing measures, sustainability or continuity of the measures is most important. But most measures aimed at increasing the supply of houses that are being debated at the moment do not seem to have that factor. The builders will need to spend a lot of money for a long time before they make a profit, so they will have to bear a heavy financial burden. Or regulations are so strict that the supply of housing units is likely to shrink excessively. When establishing and executing measures, a consensus among people on the intentions of them is important, but their ultimate effects in the market should be taken into account as well.
If stabilizing housing prices immediately is the most urgent task, a reduction in the tax on profits gained by selling houses should be examined. If the tax on profits gained through the sale of houses was lowered, house owners would try to sell their houses, increasing the supply of houses and thus stabilizing housing prices. Another option to stabilize housing prices is a measure to issue permits for the sale and purchases of houses. But that measure might be viewed as unconstitutional and is not suitable to be enforced for a long period. Thus, the most effective method to make available houses that owners do not try to sell in fear of heavy taxes is a reduction of the tax on profits from the sale. This could be called the Sunshine Policy of the real estate market. As the government has struggled to keep housing prices in certain areas under control, such areas have drawn people’s attention and people’s expectations to make profits have grown. When the government carried out projects on certain lands, it gave compensation to land owners. There are other people with money who cannot find adequate investments. Such money backs the demand for houses in the areas where the government has fought to stabilize housing prices. These factors make the government measures less effective.
The most effective and surest way to stabilize housing prices in the long term is to present measures to cope with such floating capital and to ease regulations on development. Then the private sector will increase the supply of houses.
*The writer is the dean of Konkuk University Graduate School of Real Estate Studies.
by Cho Joo-hyun