Supply is the answer

The Moon Jae-in administration has come up with yet another strong dose of actions to stamp out real estate speculation — its 21st in the last three years. Almost the entire capital region comes under “overheated or speculative zones” subject to loan regulation and higher taxes. An attempt to get loans for long-term (jeonse) rent to buy a home would become more or less impossible, because the borrower must cough up the loan upon purchase of a home valued over 300 million won ($250,000) in districts labeled speculative. The move is to prevent people from using jeonse loans to buy homes in the capital region.

Loans for rent or jeonse — Korea’s unique rent system in which tenants can live two or more years upon paying a lump-sum deposit — are easier to take out than mortgages. That’s why it has often been used by landlords to buy an extra home, which is referred to as “gap investment” in Korea. The clampdown on such investments could be necessary to curb home prices.

But that carries a downside risk of stoking rent prices. After the last strong Dec. 16 measures, tenants suffered due to a spike in rent prices. How much the latest move will curb gap investments is questionable. If rent prices jump, rich landlords won’t have to use loans to finance gap investment.

All of the past real estate measures caused side effects. The government promised to increase supplies if demand is strong in urban redevelopment areas. The only effective supply measure the government took was the plan to build apartment complexes in Yongsan, Seoul. But the latest measure would only squeeze the supply end. The government vowed to strengthen safety requirements for redevelopment and seize excessive profits. If supply is capped, housing prices cannot be stabilized no matter how much demand is suppressed. Moreover, rent prices would jump.

Due to repeated mistakes in real estate measures, appreciation in home values in Seoul remains the fastest among major metropolitan areas. The measures mostly cause a balloon effect. The government trots out an action to correct side effects, leading to a chain of regulations. It neglects to increase supplies in inner Seoul. Apartment openings in Seoul next year will be halved from this year. Home prices can never be stabilized without enough supply in Seoul. President Moon Jae-in will never be able to keep his promise to normalize home prices within his term through such near-sighted — and ineffective — actions.