Try incentives before regulations

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Try incentives before regulations

Korea’s home rental market is undergoing a phase of structural transformation. The landlords of housing properties are leaving the market. In the rental market, housing prices must rise in order to generate profit for the owners and landlords. But housing prices have not changed for years, sapping the appetite and attractiveness of the long-term rental market.

Landlords are opting for monthly rent schemes instead of the usual two-year jeonse lease because the lump sum hardly yields returns due to low interest rates. They can make more from monthly rent instead of putting the lump sum in the bank. This explains why long-term jeonse rates have been rising steeply in this environment.

Imposing a cap to rein in the amount of money landlords can raise in the renewal of their leasing contracts could further dampen the market by accelerating the exit of suppliers. This move aimed at stabilizing the rent market can only reduce supplies and worsen the situation.

Even if landlords are restricted in raising rent prices, they won’t be able to leave their properties unoccupied for long. Once rent control becomes active, they also won’t be able to suddenly change the leasing contract from a monthly to annual or biennial basis. Proponents for the rent increase cap argue this logic would help ease the rental market.

This may be true in the short-term. But in three to four years, the market could be entirely different. Landlords would give up long-term rentals altogether, instead opting for monthly rent.

The Democratic Party is considering a bill that would propose a type of “flexible rental control,” which is largely employed in European countries, that would be applied to current tenants. But the party has not sufficiently studied how European countries have worked out and applied the formula.

The system works in these countries because the government offers various incentives to private housing landlords through an exemption in transfer income tax, low-interest loans, and tax benefits in real estate investment. Germany, which prohibits landlords from increasing rents more than 20 percent over three years, has a stable rental market because rental supplies have increased through various incentives to landlords during the real estate boom in the 1980s. Because there are sufficient housing supplies to rent, the 20 percent cap over three years does not affect the tenant or the owner.

The British government revised its housing law in 1988 to boost investment in the rental market by scrapping limits on rent rates in new leasing contracts. France allows landlords to deduct a portion of real estate investment on their income tax returns.

Some argue that Korea’s rental market for commercial buildings is well-run, despite the control on rent prices and without any incentives. But rent increases are limited to 9 percent per annum. The market has not been disturbed by the rent control because the cap is not that low.

Most of all, the government must create an environment in which tenants can stably reside in their homes. Few would disagree. But this goal cannot be attained merely through a cap on rental rate increases, no matter how flexible it may be. Before that, the government would have to provide strong incentives to private housing landlords so they can willingly obey the state-controlled rent guideline. That is how we can upgrade the outdated rental market at home.

Translation by the Korea JoongAng Daily staff.

*The author is a professor of real estate studies at Hansung University.

By Lee Yong-man
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