The Peninsula

Moon Takes on the Housing Market

This briefing comes from Korea View, a weekly newsletter published by the Korea Economic Institute. Korea View aims to cover developments that reveal trends on the Korean Peninsula but receive little attention in the United States. If you would like to sign up, please find the online form here.

What Happened

• The Ministry of Land, Infrastructure, and Transport confirmed plans to impose a price ceiling on new apartments built on private land to curb the cost of living.
• Real estate prices of Seoul’s affluent Gangnam district is expected to rise more rapidly in the second half of 2019.
• Reflective of the supply constraint, Seoul Housing & Communities Corp. announced plans to undertake a pilot project to construct a compact city over a highway.

Implications: Conventional policy tools deployed by the Korean government until now have been inadequate to curb housing demand in metropolitan Seoul. New supply has been added to satellite cities surrounding the capital, but heavy traffic and insufficient public transportation connecting these new exurbs to the city center have discouraged people from moving to these new areas. Analysts fear that the price ceiling may exacerbate the situation if construction companies are insufficiently incentivized with high returns to take on new projects in the city.

While measures to add more bus routes and extending the subway line could mitigate some of the constraints, adding new supply of housing inside the city may be the most direct way to tackle the rising cost of living. To this end, one construction company has taken on an ambitious project to maximize the city’s use of vacant air space over highways and other public infrastructure. However, this plan has not yet been widely adopted. As such, volatility in Seoul’s real estate market will continue to pose a major challenge to President Moon Jae-in for the duration of his term.

Context: Successive South Korean presidential administrations have struggled to control the housing market. In 2007, the Roh Moo-hyun administration imposed a price ceiling on new apartment units in an effort to curb increases in the cost of living. The policy was unsuccessful in moderating prices because construction companies reduced investments in new projects, leading to housing scarcity in Seoul. Taking office in 2008, President Lee Myung-bak attempted to address the widening gap between supply and demand by pushing private developers to invest more aggressively. Succeeding Lee, President Park Geun-hye reversed the Roh era price ceiling in 2013 and introduced tax incentives for home buyers. However, these policies have failed to curb the rise in housing costs.

Korea View was edited by Yong Kwon with the help of Yusong Cha, Stephen Eun, Taehwa Hong, and Hyoshin Kim.

Picture from user Chris Harber on Flickr