[The Economics of Housing Price Controls] Reconstruction Eliminates Waste!

Reconstruction means tearing down old apartment buildings and building new ones. Apartments that were built a long time ago are very inconvenient to live in. It is not just that their colors have faded and the heating does not work well; the interior layouts are inconvenient, and the designs themselves do not appeal to consumers. Compared with 20 to 30 years ago, people’s income levels have risen three- or fourfold, or even more, so they want housing environments that are larger and better than in the past. It is only natural that apartments built long ago no longer satisfy consumers.

This is what reconstruction projects involve. The floor area of each apartment unit is expanded, and the distance between buildings is widened. To secure ample parking space, underground areas are excavated broadly and deeply. Rather than stopping at the level of simple flowerbeds with trees and flowers, they create walking paths, waterfalls, and safe and beautiful playgrounds. Trying to do all this on limited land inevitably makes the buildings taller. As a result, reconstruction generally leads to high-rise development.

Many people have taken a critical view of reconstruction. The biggest reason is the claim that tearing down perfectly usable homes and rebuilding them is a waste of resources. That is wrong. It is far more wasteful to force land that could be put to very valuable use with good housing to remain occupied by old, worthless housing. Reconstruction is an essential process for using land efficiently when it had previously been used inefficiently.

Another important criticism is that reconstruction drives up housing prices. In the short term, that is true. If land that had been used with little value can now accommodate good housing, it is only natural that prices rise. It is true that a 9-pyeong apartment slated for reconstruction can sell for more than 500 million won, but that price reflects not so much the value of a 9-pyeong apartment as the value of the future 20- to 30-pyeong apartment to be built on that site. The reason nearby housing prices rise is that people believe reconstructed apartments will improve the surrounding area. Few methods are as effective as reconstruction for increasing housing supply in areas where demand is surging. One major reason apartment prices in Gangnam soared under the Roh Moo-hyun administration was also the blocking of reconstruction in that area.

However, reconstruction also brings many troublesome problems. During the construction period, traffic in surrounding areas becomes congested, and because residents of the demolished housing must live nearby for several years, jeonse prices in surrounding areas may also rise. But if such pain cannot be endured, then the task of recreating an old city cannot be accomplished either.

Original title: [집값잡기의 경제학 ] 재건축은 낭비를 없애는 일!

Author: Center for Free Enterprise (CFE)

Date: 2006-12-14

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=20&idx=10682