Don’t bend the stick

Lee Hyun-sang
The author is a columnist of the JoongAng llbo.

The real estate policy under President Moon Jae-in was bound to fail as it was designed as a one-dimensional concept. The idea was simple. Housing prices would come down if demand was suppressed through regulations, taxes, and increases in public rentals. Or so the president thought. The government neglected the fact that a market involves expectations, greed, money and sentiment. Soon after his inauguration, Moon half-jokingly said he would treat everyone to pizzas if he solved the real estate problem. Half-way into his five-year term, he declared the real estate market stabilized — based on misleading statistics. He faces no risk of having to buy pizzas for anyone.

The transition team of President-elect Yoon Suk-yeol also appears to be approaching the issue with a simple mindset. The measures the transition committee has come up with are merely the undoing of regulations tightened under the Moon administration. The extra levy on capital gains for multiple home ownership will be suspended, three laws related to tenants’ rights will be scrapped or scaled back, regulations on redevelopment of old apartments will be eased, and the loan-to-value (LTV) ratio for mortgages will be raised. But thinking that undoing regulations will solve everything is as simple and one-dimensional as thinking that real estate prices can be contained through regulations.

To straighten a bent stick, said Vladimir Lenin, you bend it in the opposite direction. But economic policy involving the lives of people is different from an ideological struggle. If too much force is used to straighten the stick or bend it in the other direction, the stick could break. A public policy must sustain minimum consistency regardless of the change in governing power. Above all, the principle of one household owning one home must not change. While offering a grace period on the capital gains tax extra levy, the government must send a clear signal to multiple homeowners to sell some of their properties as taxes will eventually be raised.

President-elect Yoon promised to raise the LTV ratio for mortgages to 70 percent. But household debt levels are already high. The International Monetary Fund (IMF) advised the Korean government to tighten loan regulations through the LTV ratio or the debt service ratio (DSR). Housing prices had been fueled by liquidity. In the memoir of former liberal President Roh Moo-hyun, authored by Rhyu Si-min, now a liberal pundit, the late president recalled how he regretted believing his aides and ministers who told him that skyrocketing real estate prices could be tamed without regulating liquidity.

Yoon should take note of that regret.

Although the real estate market cannot be compared to war, neither can be won without thorough planning. Modern warfare usually starts with missile attacks on an enemy’s command headquarters, air defense capabilities, weapons storage, and other strategic locations before sending in ground forces. Risk control is the key to any combat operation. The United States recovered Kuwait from Iraq through a 100-hour ground operation after 40 days of nonstop air attacks during the 1991 Gulf War. The incoming government must not make the mistake of mobilizing ground forces without destabilizing the air defense bases in its deregulation campaign.

Fortunately, there is time for the incoming administration. The market has been taking a breather since the second half of last year ahead of an interest rate hike and liquidity tightening. Some experts worry about a crash in housing prices. The new conservative administration need not take the risk of upsetting the market by simply doing the opposite of the previous administration. A foolish commander sends his soldiers to a battleground as soon as they are available. The Moon Jae-in administration turned to that strategy by trotting out 27 sets of makeshift real estate measures and was utterly defeated. Building credibility and predictability through a meticulous roadmap must come first.

A conservative administration is stigmatized as being for the rich. Yoon’s government faces that suspicion. The composition of his transition committee has already stirred controversy. The incoming government will lose steam in its policies if real estate measures add to the suspicion. Property prices in the rich neighborhoods of Gangnam have started showing signs of a rebound. Multiple home owners could be tempted to cling to their assets as long as possible with expectations of taxes coming down. The wind could turn unfavorable for Yoon, who was elected president thanks to public disapproval of soaring real estate prices.