Unnecessary regulations

A string of real estate measures rolled out by authorities in August and earlier this month clearly signal the Moon Jae-in administration’s direction on property. They intend to contain demand through strong regulations instead of increasing supply. The Aug. 2 measures were strong enough to scare the market. The government mobilized all possible regulatory means — a surtax on multiple homeowners, a ban on transfer of ownership rights in redevelopment districts, and restrictions on mortgage loans. So far, the measures have succeeded in fending off speculative forces.

But the excess regulations that placed Seoul under speculative watch have caused casualties in some neighborhoods. Home prices have plateaued to some extent as many were pushed to the sidelines to wait out the storm. Overall prices of apartments in the posh neighborhoods of Gangnam in southern Seoul and around the capital have turned south. But it is too premature to say the heat is off. Prices in residential areas with good accessibility and schools are still strong due to real demand. Rent prices also vary according to districts.

Homeowners worry about the stretch in the tax bill. They are unsure whether they should sell or hold onto their properties. Once under registered, multiple homeowners can contribute greatly to national coffers. They should be given incentives in property taxes, national health insurance and pensions so that they are encouraged to register and rent their excess homes for profit. Because rent on registered supplies are capped, the more they join, the more stabilized the rent market will become. Yet the government chooses not to see the positive side and is entirely engrossed in tax levies.

The redevelopment measures are equally near-sighted. Banning sales of ownership rights in apartments with redevelopment potential helped to stabilize the volatility in the market. These apartments are very old and raise safety concerns. Many apartment complexes are beginning to delay redevelopment or return the permits because of the ban on sales. The delayed redevelopment reduces the supply in southern Seoul and could fan apartment prices.

Although the government claims that the measures won’t affect real buyers looking for homes to live in, the reality is different. The government limits the definition of “real buyers” to those without any home. Those wishing to move to a new home also come under tougher restrictions in taking loans and bidding for new supplies. The government needs to review its definition of “real buyers.” On Sept. 5, the government included Bundang District in Seongnam, Gyeonggi, and Suseong District in Daegu on the lengthy list of neighborhoods that fall under strict scrutiny as “overly speculative” zones. Home prices in the two areas have jumped over a short period of time largely because of their relative cheapness or lack of regulations.

The government listed the two areas because it deemed speculative forces have branched out from Seoul. It also warned that areas in Incheon, Anyang, Seongnam, Goyang and Ilsan in Gyeonggi province as well as districts in Busan would come under “special watch.” It more or less was sending a message that the government plans to extend a watch over the entire nation to force home prices down.

The government is coming down hard on the new apartment market. It plans to cap sales prices in private supplies if the value doubles the inflation pace or bids exceed the offer by five to one. It follows on the blind belief that speculative forces are behind prices going up. Regulations can cool the market in the near term, but they could spring back up if there is enough underlying demand. It is therefore important to keep the supply flowing and spread out the demand. Moon, in a public debate marking his 100th day in office, vowed that his government has other options at hand if property prices continue to go up. In short, the government will keep going with its clampdown.

Forcibly subdued prices through regulative activities can in the end damp investment and consumption sentiment. Consumer spending that showed improvement turned subdued again, hurting overall domestic demand. Household livelihood will become harder when interest rates go up in tune with higher rates in the United States. There is no panacea in real estate measures. The actions must be selective. Repressing demand alone cannot stabilize the housing market. Prices are bound to jump up later.

The fundamental solution is increased supply. Rentable properties should become available in popular neighborhoods in permanent terms. If it is not easy to expand supply immediately, authorities should try to fan out demand in the meantime. Real estate measures should come in a mix of short- and longer-term actions.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, Sept. 20, Page 33

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

Kwon Dae-joong