Price Caps on Private Housing Sales Should Not Be Applied Retroactively

No Retroactive Expansion of the Price Ceiling on Private Housing Sales

On August 12, the Ministry of Land, Infrastructure and Transport (Minister Kim Hyun-mi) announced its “proposal to improve the criteria for applying the price ceiling on private housing site sales.” The main points of the revision can be broadly summarized in three parts. First, it will apply the price ceiling system to apartments on private housing sites as well, thereby imposing price controls, while relaxing the mandatory conditions for application and greatly expanding its scope. Second, it will retroactively apply the system by changing the point at which the price ceiling applies from “complexes that have applied for approval of a management and disposal plan” to “complexes that have first applied for approval to recruit occupants.” Third, it will extend the resale restriction period for apartments subject to the price ceiling on private housing sites from 3–4 years to 5–10 years, and in addition introduce a mandatory residency requirement of up to 5 years. In short, the government intends to make regulation stronger, more thorough, and broader in scope—and to do so retroactively.

This measure comes 11 months after last year’s “September 13 Real Estate Stabilization Measures.” As housing prices, which had briefly paused, began rising again from this June, the government has introduced additional regulatory measures. However, like past anti-market real estate policies, this measure too will have no real effect and will only produce greater negative side effects. It may appear temporarily and superficially “stable,” but it will soon worsen supply shortages and drive prices up even further. It is a timeless truth, across East and West and throughout history, that the stronger the attack on the market, the stronger the market’s retaliation.

It must be pointed out in particular that this measure includes several steps that could pose a serious threat to a free market economy and a free society. Looking at the three measures mentioned above, the problems are as follows.

First, there is the problem of the price ceiling system itself. The price ceiling system is a scheme under which, when housing is sold, the sale price is calculated by adding an appropriate profit for the builder to the land cost and construction cost, and then requiring that the housing be sold only at or below that price. To think that the government can “objectively” measure the “proper price” of a particular good or service is the product of ignorance of economics and a brutal assault on scholarship. For example, with this way of thinking, one cannot explain why “water,” which is essential to life, is almost free, whereas “diamonds,” which are not necessary for survival at all, are expensive. But economics already explained this paradox neatly more than a century ago through subjectivism: such phenomena occur because of the subjective valuation felt by each individual consumer. And this subjective valuation differs greatly depending on the knowledge and information each individual possesses.

That is why, in a free market economy, the problems of dispersed knowledge and information possessed by individuals are resolved through supply and demand and a free price system. By contrast, socialists who do not understand or acknowledge this mistakenly believe that they can manipulate the market by fixing and controlling the prices of goods and services. The socialist experiments of the former Soviet Union, Eastern Europe, and North Korea were manifestations of this illusion—or this arrogance of knowledge—at its peak, and we all know well the disastrous results.

Second, there is the problem of retroactively changing the point at which the price ceiling applies. The government says it will change that point from the current “complexes that have applied for approval of a management and disposal plan” to “complexes that have first applied for approval to recruit occupants.” If the applicable point is changed in this way, even complexes already pursuing reconstruction on the belief and plan that they would not be subject to the price ceiling will reportedly become subject to it retroactively. This appears to be an unconstitutional measure that violates the principle barring retroactive application of the law.

Article 13(1) of the Constitution of the Republic of Korea provides that “all citizens shall not be prosecuted for an act which did not constitute a crime under the law in force at the time it was committed.” Also referred to as the “principle prohibiting retroactive legislation,” this provision means that one cannot be held responsible after the fact for conduct that was lawful when undertaken. The prohibition of retroactive legislation is a key element of what is called the “rule of law,” a fence that allows people to live freely. If people could be punished at any time through retroactive legislation for actions they took in the past, then no one could be free in any action whatsoever.

Third, homes subject to the price ceiling system will face resale restrictions for up to 10 years, and there will also be a mandatory residency period requiring occupants to live there for up to 5 years. Put simply, once a person is allocated a home, he or she will not be able to buy or sell it within 10 years and will be required to live in that home for 5 years no matter what. It is my home, yet I cannot sell it as I wish or move somewhere else. In other words, while “I” am the formal and nominal owner of the home, there is virtually no difference from saying that the government holds the real authority to sell and dispose of it. This is not merely an infringement of private property rights; it is close to deprivation of property rights altogether. And is saying that one must mandatorily reside there for 5 years any different from saying that the constitutionally guaranteed freedom of residence and movement is being restricted for 5 years?

Like previous anti-market real estate measures, the August 12 real estate policy will fail to achieve its stated goal of “stabilizing the real estate market.” Moreover, these measures include unconstitutional and anti-free-society elements. No matter how noble the justification may sound, policies that threaten the very foundations of a free society and a free market economy cannot be tolerated.

Hyukchul Kwon (Vice President, Center for Free Enterprise (CFE))

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Original title: 민간주택 분양가 상한제 확대 소급 적용 안 된다

Author: Hyeok-cheol Kwon

Date: 2019-08-13

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=13&idx=20430