Some degree of control necessary

When the real estate business was brisk, housing purchases accounted for six of 10 transactions in the industry. Now rental contracts make up eight of ten real estate deals. About 60 percent of households live in rental units and yet laws and systems hardly can be called tenant-friendly in our country.

The housing policy should be revised in order to protect and guarantee better living conditions for the bigger share of the population who opt to live in rented homes instead of their own place.

There are two key mechanisms to stabilize the home rental market - stabilizing rental supplies and maintaining tenable rental fees. A stable supply cannot be created overnight; there needs to be a more farsighted policy. But price controls can be applied almost immediately. A cap on rent increases would help our outdated rental market structure if tenants use it well to enhance their leasing rights when negotiating with landlords.

Some real estate experts oppose the rent cap, as it may interfere with the free market principle that works on the supply and demand mechanism and can cause a shortage of supply. If owners are restrained from raising rents to a certain limit, they may be tempted to demand hikes that could have been increased gradually over four years or hold onto the properties until the cap is lifted. But this scenario is possible in a normal rental market, which ours is not.

A legal framework on rental increases can help to equalize and normalize the relationship between landlords and tenants, which so far has been defined more by time-worn customs that put tenants at the mercy of their landlords’ whims. Even a small increase in rent fees - which in some cases in Korea can exceed the actual value of the property - could cause a tenant to leave. Control on rent fees has become essential to the public welfare and housing market as the majority of households live on leasing contracts.

No country is completely laissez-faire on rent fees. They are reined in by various regulations and legal codes. Rent prices in advanced societies are set according to negotiations and compromise between landlords and tenants based on constitutional and legal rights, as well as by various regulations. The British government has been employing the maximum fair rent order and rent assessment committee to regulate rent prices at affordable and negotiable levels. France also imposes controls on rental increases so that rentals cannot go higher than the previous rate and inflationary increases. Any hikes must also be negotiated between owners and tenants. Germans also regulate and control rent with a differentiated rate system across the nation. These countries all regulate rent increases within the boundary of market order.

Opponents argue that capping rental rates is unconstitutional and infringes on individual property rights. But our constitution and civilian laws define an equal status in the relationship between landlords and tenants. The rental laws on housing and commercial properties already limit price hikes in order to protect occupants. Rent control therefore can restore the constitutional and rightful status of tenants and rates to a fair level, which would be true to our laws and pro-market principles.

Some also worry that a cap could generate a sudden spike in rent rates and scarcity in the rental supply. But there are many ways to minimize these effects. For instance, the cap could be first imposed in certain areas and neighborhoods while carrying out rent control by drawing up standard rent guidance across the nation after years of investigation on the rate changes.

By the time the government enforces a universal cap on rental rate increases, landlords and tenants would have reached a compromise on rates based on the government’s price guideline. Rent prices and the supply would have naturally stabilized by then. Moreover, in one TV broadcasting station’s survey, 76.5 percent supported the idea of imposing caps on rent increases.

Translation by the Korea JoongAng Daily staff.

*The author is a professor of urban and regional planning studies at Dankook University.

By Cho Myung-rae