The Economics of Controlling Home Prices: Transaction Restrictions Run Counter to the Market Economy

Among capitalist countries, it would be hard to find one where the government arbitrarily restricts land transactions as much as ours does. Every time land prices or housing prices rise, transactions are regulated, with the result that more than 20% of the entire national territory has now been designated as a land transaction permit zone. It would hardly be an exaggeration to say that virtually every reasonably livable area has been placed under a permit zone.

The purpose is to control housing and land prices. But there is no evidence that transaction restrictions have actually curbed land prices. They have only made transactions disappear. A considerable portion of those vanished transactions goes underground and is transformed into deals carried out through various loopholes and irregular methods. But that does not lower land prices in those areas.

Rather, it brings about nothing but a range of side effects. The biggest side effect is that it causes premature development and, along with it, low-density development. Under the land transaction permit or reporting system, only land purchases intended for immediate development are allowed. As a result, those who plan to develop land early end up taking possession of it. And in general, premature development means low-density development. Over the longer term, low-density development leads to higher building prices by reducing the supply of buildings. In the long run, facilitating land transactions allows land to be used more efficiently. Only then can real estate prices also fall.

The right to sell pre-sale housing units is also subject to a resale ban. The reason such rights exist is that housing is sold in advance. Pre-sale means selling ownership of a home to be built in the future, long before the house is completed. A pre-sale right may be understood as the right held by the successful applicant until occupancy. Because these rights are easy to trade, they have long been actively traded. The government has treated this active trading as speculation and banned it.

Unfortunately, banning the resale of pre-sale rights hinders the supply of new housing. Pre-sales serve as both financing and insurance provided by consumers to builders. Consumers, in effect, receive units at a price lower than the price that will be formed after completion, but in return they pay in advance and assume the risk that the price may fall. Because this kind of transaction benefits both construction companies and consumers, pre-sales have become established as the dominant housing sales system in Korea. If the resale of pre-sale rights is prohibited, the appeal of pre-sales diminishes accordingly, and the supply of new housing will also decline.

Original title: [집값잡기의 경제학 ] 거래 제한, 시장경제에 역행한다

Author: Center for Free Enterprise (CFE)

Date: 2006-12-14

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=20&idx=10685