Supply is the key

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Supply is the key

Prices are determined by supply and demand. The more people selling, the lower the price, and vice versa. Housing prices are no exception. If demand exceeds supply, prices go up. That’s why real estate prices in Seoul have soared recently.

Lee Hae-chan, the new head of the ruling Democratic Party, urged the Moon Jae-in administration on Monday to first increase housing supply on a large scale to stabilize the overheated real estate market. Last month, Lee asked the government to consider the idea of raising the comprehensive real estate tax for people with more than three residences or apartments that are particularly expensive — a traditional approach based on controlling demand through heavier taxation. But this time, he suggested a better direction by calling for the expansion of real estate supply.

Data shows that 96.1 percent of all households in Seoul either live in their own homes or rent as of 2016. But Statistics Korea projects the number of households in Seoul to increase by 10,000 annually through 2022, which explains why more apartments need to be built in the city. In particular, the number of units in the four wealthiest district in southern Seoul decreased last year, according to one opposition lawmaker.

Quoting data from the Land Ministry, Rep. Kim Hyun-ah of the Liberty Korea Party said that 17,647 apartment units were destroyed while 15,093 units were built in the four richest districts. A lack of supply in those areas cannot but help cause a rise in housing prices. On top of that, abundant liquidity in the market helped fuel the increase.

The answer is already there: increase supply. Since Seoul does not have not much land left to build on, the authorities must revitalize reconstruction and redevelopment, which calls for deregulation. At the same time, the government must provide as much quality public housing as possible to stabilize the market. The government announced a plan last year to build one million units — including for rental only — over the next five years. It must continue to push for it.

The government must also find ways to convert abundant liquidity in the market to investment in promising fields for the fourth industrial revolution. If it adheres to curbing demand to prevent speculative forces from exploiting the market, that will only backfire. The government must push a real estate policy based on expanding supply. Only then can expectations for a stable property market grow.
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