[The Economics of Curbing Home Prices] Regulating Pre-sale Prices ≠ Lowering House Prices

As apartment prices have surged, calls are growing—especially among civic groups—to regulate the presale prices of privately built apartments. This is because many believe that rising presale prices are the main culprit behind the price spike. However, the claim that the presale prices of new apartments drive up the prices of apartments overall is unfounded.

First of all, newly presold housing accounts for only 3% of the total. For that reason, housing developers set prices based on what existing apartments are selling for; they cannot attach absurdly high price tags. If they did, the units would go unsold.

Of course, psychological factors can cause nearby apartment prices to rise in the short term. But over even a slightly longer period, price increases that are not supported by fundamental value do not last. Only when the move-in of new apartments in a nearby area improves the residential environment of existing apartments can the short-term rise in surrounding prices be sustained over time.

Take Incheon, for example. In Songdo New City, POSCO E&C and others set presale prices higher than those in surrounding areas, and it is true that apartment prices in nearby districts also rose as a result. However, in the rest of Incheon, concerns are now being raised about oversupply. The rise in land prices in nearby areas should be understood as resulting from improved residential conditions in what had previously been outlying districts due to the development of the new city. If presale prices had been strictly regulated and the supply in Songdo New City had been blocked, apartment prices in Songdo would have been lower, but apartment prices across Incheon as a whole would have surged.

In the past as well, presale prices were regulated up until the IMF crisis, but that did not cause housing prices to fall. Regardless of presale prices, prices rose when demand was high and supply was limited (late 1980s to late 1991), and fell when supply increased (1991–1997). In fact, price controls on presales only led to waste, as cheaper building materials were used and buyers ended up tearing apart and remodeling their homes just before moving in. People who won apartment allotments also enjoyed the special privilege of huge premium gains.

Only after presale price controls were lifted did mixed-use apartment complexes begin to be built in earnest in city centers, and high-end housing suited to our citizens’ income levels began to be constructed. Presale price regulation would not only reduce housing supply, but also push Korean apartments back to the outdated standards of the past.

Original title: [집값잡기의 경제학 ] 분양가 규제 ≠ 집값 낮추기

Author: Center for Free Enterprise (CFE)

Date: 2006-12-14

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=20&idx=10680