Ignoring the Market’s Voice in Third New Town Development

The government has announced its plan to develop third-generation new towns. Following the first-generation new towns of Bundang and Ilsan, and the second-generation new towns of Dongtan in Hwaseong and Unjeong in Paju, Changneung in Goyang and the Daejang district in Bucheon have been selected as third-generation new towns. With this, the government has completed its plan, announced in the 2018 “9.13 Real Estate Measures,” to supply 300,000 homes in the Seoul metropolitan area.

A policy of expanding supply is welcome. Until now, the government has tightened policies aimed at suppressing demand in the name of curbing housing prices, including regulations on mortgage loans, the excess reconstruction gains recapture system, price ceilings on pre-sale apartments, and higher capital gains taxes. While these tough regulations have succeeded in restraining the rise in real estate prices, their side effects have been far from negligible. Even people without homes have found it harder to buy one because of lending restrictions, and transactions have frozen to the point that people can neither buy nor sell homes. The third-generation new towns appear to be the government’s attempt to supplement its demand-suppression policies.

However, this new-town supply solution can hardly be seen as matching market demand. That is because the housing is not being supplied where homes are truly needed—where demand is high and prices are high. When reporters asked whether the third-generation new towns could absorb demand from Gangnam, Minister of Land, Infrastructure and Transport Kim Hyun-mi responded by asking, “Is Gangnam really that great?” Former Blue House Policy Director Jang Ha-sung also said, “There is no reason every citizen has to live in Gangnam.” It is hardly an exaggeration to say that the reason the government’s strong real estate measures have produced only adverse effects is that it has failed to properly identify the causes of rising housing prices.

Areas where many people want to live generally share several characteristics. They have quality jobs, convenient transportation, good schools, and various amenities, all of which contribute to a high level of satisfaction with daily life. In particular, for urban households with a high proportion of dual-income earners, proximity between home and workplace is a key criterion in choosing where to live. The fact that housing prices in places such as Gangnam’s three districts, Seongnam, and Gwacheon have risen even as prices in other areas have fallen reflects this market demand. Therefore, it is natural that housing prices rise mainly in these areas, and that proximity to them becomes a major yardstick in determining real estate prices.

When supply is limited in the areas everyone wants, prices are bound to be high. Older housing in the Gangnam area is prevented from being rebuilt because of regulations, and while demand for high-end housing is strong, supply is woefully insufficient. Reconstruction should be allowed so that old apartment complexes can be transformed into new, livable apartments.

Allowing reconstruction may make housing prices appear to rise in the short term. But that is merely a reflection of the fact that old apartments, which had long failed to command their full value because of their age, begin to reflect their post-reconstruction value. Once residents actually move into newly built apartments, the expanded supply can help stabilize housing prices not only in the area itself but also in surrounding neighborhoods.

The government has intervened in the real estate market and rolled out various regulatory measures. Yet it has failed to stabilize housing prices and has instead only increased instability in both transactions and prices. This new-town supply policy, too, is highly likely to fail. Although the government says it will supply 300,000 homes in the new towns, those are not areas backed by demand on that scale. The most effective solution for stabilizing housing prices is to supply more homes in the places where people actually want to live.

According to statistical data, 20% of Gyeonggi Province residents commute to Seoul for work or school. As a result, traffic congestion occurs, and many people are forced to waste unnecessary time on buses and subways traveling into Seoul. If sufficient supply is not provided where demand is high, inefficiency arises across society as a whole. That is why it is important for real estate policy to be implemented in line with market principles.

Eun-kyung Kwak

Center for Free Enterprise (CFE) Corporate Culture Director

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Original title: 시장의 목소리 외면한 3기 신도시 건설

Author: Eun-kyung Kwak

Date: 2019-05-22

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=25&idx=20199