The Seemingly Uncatchable Price of Houses: Price Regulation of New Apartments
In South Korea, reconstruction and redevelopment have frequently appeared these days as housing demand is steadily increasing due to the city’s high population density. However, the current housing supply is not fully meeting the housing demand. The government defines this situation as "Overdemand by Speculative Demand." It means that the housing demand is aimed at economic purposes, not for residential purposes. As a result, this situation has created higher false demand than the actual demand. For example, according to the government’s research in 2018, 34,345 households in Seoul were in demand, and 440,161 households were in supply. In short, demand and supply are well matched, thus it is possible to say that housing prices in Seoul have risen tremendously due to speculation. The government has now moved into the free market to control rising housing prices. In the process, the government introduced a new policy, called the "Price Regulation of New Apartments." However, some strongly disagree with this policy. Why are there controversies over Price Regulation of New Apartments? Let's find out what the price regulation of new apartments is and the reasons for this controversy.
1. What Is Price Regulation of New Apartments?
Definition of Price Regulation of New Apartments
Following the Ministry of Land, Infrastructure and Transport's definition, the price regulation of new apartments is to control the price of new apartments close to the money essential for the construction. The sale price, calculated by the upper limit on sales prices, will be set at the sum of the price of land where houses will be built and the price of construction. The land price is calculated through an official land appraisal evaluation, and the construction price is calculated based on the standard of the Minister of Land, Infrastructure and Transport. The standard allows prices to be updated once every six months to reflect current economic situations.
The Reason for the Induction of Price Regulation of New Apartments
In the past, the price regulation of new apartments was introduced because of speculation in the real estate market, which resulted in failure to meet the housing demand well. To find out the cause of the real estate market's failure, Korea's sales system should be considered first. The domestic sales system in Korea is divided into the pre-distribution system and the post-distribution system. The pre-distribution system is a method of raising funds from individual buyers before the construction starts. In this case, the buyers pay lower money than pro-distribution buyers first then pay a certain amount of remaining prices during the construction period. If it is fully paid, the apartments will be owned by buyers. The post-dissemination system is similar, with the rest of the supplies being sold to buyers at a time when construction is almost finished. There is a difference in the amount of money to be paid at once, which happens in a shorter time compared to the pre-distribution system. The downside is that it is difficult for both systems to figure out prices through accurate prediction. Therefore, the price determined by the construction company will soon become the price of the new apartments. As a result, the price equals the price that the construction company set. Real Estate 114 published statistics that shows the price per Korean standard ‘Pyeong(3.3m2)' among apartments nationwide rose steadily, surpassing 13 million won in June 2019. The rise in sales prices leads to a rise in the housing prices of the owners who sell back the next time. The government introduced price regulation of new apartments for the purpose of curbing the continuous rise of new apartment prices and preventing speculation of mean investors.
History of Price Regulation of New Apartments
The price regulation of new apartments is not the new policy to appear this time. The government has also tried to prevent confusion in the real estate market with price regulations of buildings in the past. Enacted in 1963, the Public Housing Act is the first similar policy with price regulation of new apartments. This Act was designed to target the prices of apartments constructed through cooperation with government agencies. It was in August 1977 that the scope of public-to-private housing was widely used. The price was required to be specified in the construction project plan for reconsideration by the government. However, as the economic recession continued, private construction housing was excluded from the list in June 1981. After the economic recession, all the experts worried about this circulation. Rent and sale prices rose sharply. Finally, the government announced the abolition of the ceiling in January 1989. Since then, the ceiling was put back into effect in 2007 to prevent soaring housing prices. Later, the policy gradually lost its influence with the reduction of the price standard of public housing, but it was again noticed in July 2019 when Minister Kim Hyun-mi announced his intention to re-expand the ceiling on sales prices to private housing.
2. The Effect of Price Regulation of New Apartments on Real Estate Market
Positive Effect of Price Regulation of New Apartments
So, what effect does the ceiling on sales prices have? Let's start by looking at the positive effects of the price cap on new apartments. The price regulation functions to stabilize housing prices, as mentioned earlier. As homeowners sell their houses at a higher price than they bought them in the past, they naturally raise the price of their homes in selling them. As a result, a rise in the price of new apartments will lead to a rise in whole housing prices. In fact, in a national territory policy briefing by the state-run Korea Institute of Land, Infrastructure and Transport, the price regulation of new apartments has a far-reaching impact on housing prices. The government also explained that the housing market can be stabilized by the introduction of price regulation of new apartments. The prediction from it mentioned that housing sales prices will fall 1.1 percent annually based on Seoul. The rationale for this is that the smaller the profits from capital gains, the less housing speculation can be made, thus curbing the adverse effects of the exponential rise in prices of new apartments reconstructed. In addition, a drop in the price of new apartments will naturally benefit homeless people. The fact that the price regulation on new apartments is also fairer cannot be ignored. Prior to the price regulation of new apartments, the Housing and Urban Guarantee Corporation had restricted the prices of private houses in return for a guarantee of the stability of apartment distribution. However, there are opinions that advocate the price regulation of new apartments, which seeks fair screening through the screening committee, as complaints are mounting that private housing prices will be judged according to the discretionary standards. In addition, the institute asserted that there is no concern that the housing supply will decrease due to the price cap on new apartments. Nearly 1 million houses are expected to be supplied between 2018 and 2022, as houses are continuously being supplied in accordance with the new city construction plan.
Negative Effect of Price Regulation of New Apartments
In opposition to the price regulation of new apartments, the opponents predict a negative impact of it. First, real estate experts are concerned about the contraction of the reconstruction market due to the introduction of the price regulation of new apartments. Implementation of it will certainly discourage the construction of new homes, as it will reduce the profits of the reconstruction. The real-estate experts predict the result to be a limit to the continued supply of new homes. Some predict that a fall in the price of new apartments will significantly reduce demand for homes, which could have some stability effects, but will have more side effects. When setting a price ceiling that prevents price increasing, it is necessary to find a price balance after falling prices create excessive demand and the property market shrinks. However, it often takes a long time to reach and the economy becomes seriously damaged. Care must be taken when implementing a policy that has greater harm than good. The low price of new apartments is also a cause of massive speculation, just like the existing system. As the price of a house is cheaper than that of a nearby house, the issue of speculation targeting capital gains, like the nickname "Lotto sale," may become much more serious. After the announcement that the ceiling on the price of new apartments will be enforced, consumers who are worried that the market will shrink due to the price regulation on new apartments will suddenly flock to the new market, showing a fierce competition ratio of 420 to one. The main point of the counterargument is that property accounts for a large portion of assets and should be more cautious, considering the prices do not easily change.
Opinions of agreement and disagreement have appeared when government sets new policies to meet current needs. In this situation, reviving a policy that has been tried and disappeared in the past has inevitably caused more repercussions. In this sense, the price regulation of new apartments is still a hot potato. There are side effects of the price regulation of new apartments, which can have positive effects of lowering prices, such as a rise in sales and rental fees other than the price of new apartments. There could be the advantage of providing housing equally to homeless people, but rather, the redevelopment market may fall into the dark. As such, the ceiling on sales prices is a policy that should reflect sensitively on the economic situation. Therefore, as described earlier, this policy has yet to be reflected on due to conflicts of interest. However, the government should decide whether to impose a ceiling on the price of new apartments. The real estate market is fluctuating more unpredictably as the government continues to delay the implementation of the price regulation on new apartment. We need to think about how we stabilize the real estate market side will help the stability of real estate market.< 저작권자 © 중앙헤럴드 무단전재 및 재배포금지 >