[The Economics of Stabilizing Home Prices] The Problem Is the Supply of High-End Housing

To summarize the pattern of housing price changes that emerged under the Participatory Government, the following can be said. First, housing prices in Gangnam and the areas known as the so-called Bubble Seven soared. Second, prices also rose somewhat in other parts of the Seoul metropolitan area. Third, in provincial regions, prices remained stable except in places such as the planned sites for innovation cities or the administrative capital complex in Chungcheong Province.

There are broadly two reasons for this. First, interest rates fell. Second, the supply of high-end housing was artificially suppressed.

Low interest rates were the most fundamental cause of the rise in housing and land prices. Until 1997, yields on corporate bonds had been around 12–13% annually, but after the Kim Dae-jung administration they fell sharply to around 3–5%. In other words, they dropped to nearly one-third of their previous level. Banks even began actively trying to lend money to one another, and that money flowed into housing and land. Low interest rates and an expanded money supply thus acted like gasoline on the sharp rise in real estate prices.

Moreover, the fact that the supply of high-end housing had been suppressed played a decisive role in raising prices in established upscale residential areas such as Gangnam. Since the construction of new towns in the Seoul metropolitan area in the early 1990s, such as Bundang and Ilsan, no residential districts for high-income households had been supplied. Even so, reconstruction projects in Gangnam had been the only remaining channel for supplying high-end housing, but under the Participatory Government, even that was blocked through various measures. Pangyo, which had been left as an alternative to Gangnam, was also turned into a housing site for ordinary households under pressure from civic groups. Meanwhile, mixed-use residential-commercial buildings in downtown areas, which had become more active after the liberalization of apartment presale prices, were also brought almost to a halt because of measures such as restrictions on the resale of presale rights. Most new housing supplied in Korea was for ordinary households, while the new supply of high-end housing had virtually come to a standstill. As a result, despite low interest rates, prices for ordinary housing remained low, while prices for scarce high-end housing in places like Gangnam skyrocketed.

If the goal is to bring down housing prices in Gangnam, then housing sites that Gangnam residents actually want to move to must be supplied. The problem is that the government, which controls the supply of housing land, is forcing developers to build housing for ordinary households. As long as such regulations remain in place, the rise in high-end housing prices will only worsen. The government should supply housing land, but it should allow private firms to decide autonomously what type of housing to build and for which income groups.

Original title: [집값잡기의 경제학 ] 문제는 고급주택의 공급이다

Author: Center for Free Enterprise (CFE)

Date: 2006-12-14

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=21&idx=10679