[Viewpoint]Averting housing disasterSales of newly constructed apartments in areas outside the Seoul metro area are in a serious slump. Increasing numbers of already completed apartments are sitting empty, and the inactivity is spreading to greater Seoul as well.
Last month, 25 of the 30 newly constructed apartment complexes were not filled even after a housing lottery was held for the third priority group.
According to official statistics, over 100,000 new apartments are unsold nationwide, and the number will reach more than 180,000 when unreported smaller apartment complexes are added. Consequently, many builders are going bankrupt.
Consumers might welcome the falling apartment sales since it means abundant housing. However, it is hardly good news in the long term. Around the time of the foreign currency crisis in 1998, the country suffered from a serious new apartment surplus. It discouraged the building of new housing and ultimately resulted in a surge in housing prices after 2002. This illustrates that a balance in supply and demand in the housing market stabilizes housing prices in the long run.
The primary cause of the new housing surplus is that builders have failed to follow the most basic rule ― that they should provide housing supplies where there is demand. However, the Roh Moo-hyun administration’s policy failure contributed much to the crisis.
The Roh administration proclaimed that it would stabilize housing prices, especially the price of apartments in the expensive Gangnam area, and produced all kinds of programs and regulations to discourage demand and distort the housing market.
You are able to buy a newly constructed apartment only when you can sell the house you live in. However, the government raised the sales tax on households that already own one house, and homeowners are increasingly reluctant to sell. When some people sell a big house to buy a smaller one, others can move from a small house to a bigger one. Thus blocking the flow from one side will inevitably disturb the entire market.
Home builders suddenly increased supply in areas outside greater Seoul because the administration announced tightened regulations from next year, such as a price ceiling for new apartments and restricted reconstruction projects in the Seoul metropolitan area. When the government tightens regulations on a certain area at a certain time, it is only natural that the market becomes distorted. With increasingly severe restrictions in the Seoul area, builders turn to other provinces. With the regulations coming into effect next year, they are increasing the number of new apartments before the year’s end.
The punitive tax on households owning two houses is another reason for the crisis. Even if you have a house in Seoul, you should be able to own one in another region for retirement or for investment in order for the regional real estate market to be brisk. When personal investment in housing itself is labeled as being speculative and is tabooed, the housing supply will have to rely solely on public builders in the end.
The construction industry is a big employer. The Korea Housing Institute said that investment of 1 billion won ($1.1 million) in housing construction leads to the employment of 23,600 workers. Therefore, the demise of the home construction industry undermines the national economy as a whole. It creates an imbalance in housing supply and demand and also increases unemployment.
Temporary fixes are not an appropriate solution for slacking new home sales. However, the housing industry needs a soft landing that takes into account the impact bankrupt builders will have on the national economy, the consequent blow to related industries and the long-term decrease in housing supply.
For now, the government should construct policies designed for each region by adjusting the inheritance tax rate, relaxing the heavy tax on multiple home owners and differentiating financial loans.
Furthermore, the next administration needs to offer a drastic measure to normalize the housing market by redesigning the housing policy framework with an emphasis on private builders.
Most of all, home builders need to plan projects more carefully.
They need to realize that they can only survive by building homes in line with demand, making reasonable profits and pursuing a healthy business.
*The writer is an editorial writer of the JoongAng Ilbo.
by Shin Hye-kyung