If You Want Stability in the Real Estate Market

Recently, the contraction in real estate transactions has become severe. In particular, after the government introduced the “September 13 Measures” in 2018, saying it would rein in housing prices, transaction volume plunged sharply. The number of apartment sales transactions in Seoul, which was the main target of the regulations, stood at 1,877 in January this year, an 81.6% decrease from 10,198 in January last year.

From the government’s perspective, it likely wanted to show that real estate prices were stabilizing, even if that meant making market transactions more difficult. But with such short-term prescriptions, the losses are greater than the gains. That is because the side effects caused by freezing the market are just as large. Regulations that raise the cost of buying and selling and prevent participation in transactions cannot possibly benefit consumers.

In fact, a transaction should benefit both the seller and the buyer. Making such transactions difficult over a long period reduces the gains from trade. It also creates “invisible harm” when people who want to transact are unable to do so.

Of course, the government must have felt considerable political pressure from the sharp rise in real estate prices. But fluctuations in real estate prices are simply a common phenomenon in every country. In fact, Korea’s real estate prices are not particularly high compared with those of other countries, nor has the rate of increase been especially large. Even so, repeatedly rolling out high-intensity emergency measures that freeze the market is an excessive policy response.

The main components of the government’s real estate regulations are higher taxes and tighter lending. Because such regulations are not merely temporary suspensions of transactions, the harm caused by higher costs persists over the long term. Increases in taxes and related costs inevitably become a burden on participants in the real estate market. In other words, the entire public ends up paying the price. Real estate-related costs are already high enough to adversely affect the economic structure, so raising them further is by no means desirable, either for individuals or for the nation.

What is unsettling the market now is none other than the government. These short-term fixes only increase market instability and trigger sharp swings in prices. It is never desirable for the government itself to cause such transaction uncertainty and price instability. Real estate policy now needs to break decisively from the repeated cycle of short-term measures.

If the government truly wants stability in the real estate market, it must above all ease the regulations used to control the market. The market’s price mechanism must be allowed to function properly. Only then can consumer benefits increase and price stability be maintained. By nature, real estate is an asset class with relatively low price volatility compared with other assets. Removing government interference and control is the way to eliminate uncertainty and enhance stability in the real estate market.

To alleviate even somewhat the current instability in the real estate market, the first step should be to reduce the burden of transaction taxes. In fact, the share of transaction taxes in Korea is very high. This is one reason the real estate tax burden is higher than in advanced countries. What is needed now is the policy wisdom to lower transaction tax rates, ease the contraction in transactions, and reduce the burden on the public.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: 부동산 시장 안정을 바란다면

Author: Sung-no Choi

Date: 2019-02-10

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=25&idx=11420