The prices of apartments in Seoul have soared seriously in the past few years. As the house prices rise continuously, the government has effectuated various real estate policy measures to curb rising house prices. On the 16th December last year, the government announced a more stringent real estate regulation known as the 12.16 regulation. The effects and some side-effects of the policy have come into view recently, about five months after the enforcement. In this article, the Sungkyun Times (SKT) will analyze the major focus of the 12.16 regulation and whether this policy has any effect on curbing real estate prices. Furthermore, the article will suggest some complements to the Korean real estate policies.
The Background of the Effectuation of the 12.16 Real Estate Regulation
The Background of the 12.16 Regulation
In order to understand the reason for the enforcement of the rigorous 12.16 regulation, it is important to comprehend the situation of Korea during the late 1990s. In 1997 Korea struggled from a financial crisis that stemmed from the debt owed to the International Monetary Fund (IMF). The government enforced a quantitative easing policy and increased the amount of currency by more than 40%. As the amount of currency rocketed, the value of money decreased, and the value of property assets, which are relatively safe, increased. Therefore, the prices of houses, which are property assets, soared during the early 2000s. The average rate of increase in the sale prices of apartments reached 14.55% in 2001 and 22.78% in 2002. Even though the prices soared from 2001 to 2002, people had a belief that the government would curb the soaring prices as the government announced that they would develop Yongsan and new towns such as Pangyo. However, millions and millions of people were gathered to win the competitive lottery contracts in 2006 for the Pangyo new town apartments, and only a minimum number of people were able to win the lottery apartment contract. As there were still millions of people who remained “homeless” after the new town apartment lottery contracts, people’s fears of not having a house increased, and they started to buy houses with mortgage loans that they could not afford to repay. The upward trend in house prices marked a peak in 2006. In 2008, however, the global financial crisis hit the Korean economy, and the house prices started to show a downward trend. For about five years, the house price remained in a downward trend. Since 2014, the economy seemed to recover from the financial crisis, and the price of houses also turned upward again. Since then, the house prices in Seoul soared continuously, and on the 3rd of September 2018, the weekly growth rate of the apartment prices compared to the previous week showed an increase of 0.95%. It was the first time to have a weekly growth rate of over 0.9% since 2006. In order to curb the rocketing price of apartments in Seoul, the government came up with real estate regulations such as increasing tax toward multiple house owners or tightening mortgage loans. However, these real estate policies showed positive effects only for a short period of time, and the real estate market seemed to be much more overheated afterward. According to a survey conducted by a housing information provider, Real Estate 114, the average market price of Seoul apartments has soared by about 40 percent in the past two years.
|Average Apartment Price Index for Seoul (donga.com/news)|
Main Focus of the 12.16 Regulation
Even though the government implemented diverse real estate policies, the real estate market did not seem to be stabilized, and the price of apartments consistently increased. To curb the rising price of houses, the government imposed a super-stringent regulation last December 16th. This policy measure is called the 12.16 real estate regulation. There are five main points of this real estate policy.
1. Tightening Mortgage Loans to Hinder Speculative Purchases
The regulation revised the Loan to Value Ratio (LTV) and Debt Service Ratio (DSR) for mortgage loans to hinder the speculative purchase of apartments. LTV refers to the amount of a loan that banks offer, holding houses or buildings as collateral. For example, if the LTV is 40 percent and the price of an apartment is one billion won, the person who wants to buy the house can get a loan from the bank of up to 400 million won. The conventional LTV for mortgage loans was 40 percent; however, this figure was lowered to 20 percent for houses that exceed 900 million won. Furthermore, for houses that exceed 1.5 billion won, the mortgage loan is strictly prohibited. DSR refers to the total amount of household loans from credit loans or minus accounts divided by the annual income. It is recognized that the lower the DSR, the higher the debt repayment ability. On the 12.16 policy, the DSR regulation was added, and people who have more than 40 percent of DSR cannot get a mortgage loan. Through these revisions of the LTV and DSR, speculative purchases of apartments can be prevented.
2. Strengthening the Burden of Multiple House Owners Through Increasing Taxes
In order to intensify the burden of multiple house owners, the 12.16 real estate policy increased the Comprehensive Real Estate Holding Tax and Transfer Income Tax. On the other hand, the 12.16 policy not only increased the general real estate tax but also offered a six-month grace period, where the government will induce multiple house owners to sell their surplus properties by exempting transfer tax by the end of this June.
3. Expanding the Number of Districts That are Under the Parcel Price Cap
Under the 12.16 policy, the price ceiling system for new apartments will be expanded to most parts of the Seoul-metropolitan area. Conventionally, the price ceiling system was only applied to 8 districts in Seoul; however, from the 12.16 policy effectuation, the area was expanded to 13 districts in Seoul, 37 dongs in Seoul, which are facing redevelopment, and 13 zones in three Gyeonggi Province regions.
4. Establishing Fair House Contract Application Standards
In order to establish a just process of lottery contracts for new apartments, the 12.16 policy sharply increased the prohibition period of joining the lottery contract to 10 years for people who committed any illegal real estate activities.
5. Expanding House Supply for Actual Residents
The last focus of the 12.16 real estate policy is expanding the house supply for real residents. This point is the most significant change in this policy compared to previous real estate measures. The 12.16 policy includes approving the 15,000 housing supplies in Seoul until 2020. In addition, the government is planning to redevelop and repair deteriorated houses in Seoul. The 12.16 policy is praised for including the expansion of house supplies and offering breathing space for the real estate market.
Roiling Real Estate Market After the 12.16 Regulation
A Short Period of Demand Curb, Rocketing Price Afterwards
As a result of the enforcement of the stringent 12.16 regulation, the price of apartments in Seoul decreased by 0.01% compared to the previous week for the first time in ten months in the last week of last March. The reasons for the decrease in house prices are considered as real estate market recession due to the novel coronavirus (COVID-19) and increased amount of sales of houses due to the government’s intensive 12.16 regulation, such as increasing the Comprehensive Real Estate Holding Tax or exempting transfer income tax for six months. However, in the light of past data, it is clear that the effectiveness of the government regulation to curb soaring house prices is only temporary. The demand for apartments is not vanishing through government regulation but has just been suppressed for a certain period of time. Therefore, if the regulation is somewhat eased or if there is a new real estate investment market formed, there will be further rocketing house prices. For example, in 2017, the government released the Real Estate Stabilization Policy, and it seemed to curb the house price for the second half of the year. However, in 2018, the repressed demand exploded, and the house price skyrocketed. Likewise, controlling the demand for houses cannot be the fundamental solution to soaring prices due to the gap between supply and demand.
The Rise of the Jeonse Price Due to the Falling Demand of House Purchases
Jeonse is a real estate term unique to South Korea that refers to generally a two-year rental period of a property. As regulation 12.16 expanded the number of districts under the price ceiling of new apartments, the number of prospective buyers on the waiting list to purchase new apartments increased dramatically. Therefore, the demand for existing houses decreased, and the demand for jeonse soared, resulting in an increase in the jeonse prices. According to KB Real Estate Data, the jeonse prices of the main districts in Seoul, including Songpa-gu, Seochogu, and Gangnam-gu, marked the peak early this year. The increased range of the jeonse price was from about 50 million won to 250 million won early this year. According to data from the Ministry of Land, Infrastructure, and Transport, in the case of an 84 square meters Donga Apartment in Jamwon-dong, the jeonse price rose from 7.3 billion won in January to 9.8 billion won in February. Also, in the case of Banpo Xi, 84 square meters in Banpo-dong, the jeonse price increased from 1.4 billion won in January to 1.5 billion won in February.
|Jeonse Price Index in Seoul (mk.co.kr/news)|
Monopolistic Profit of the Rich with Cash
From the 12.16 regulation, the LTV ratio is reduced, and mortgage loans for expensive apartments over 1.5 billion won are prohibited. However, the regulation on mortgage loans to hinder speculative purchasing only gave monopolistic profits to the rich with an abundant amount of cash who could buy expensive apartments without loans. People who do not have enough capital to purchase a house without mortgage loans do not have any opportunity to buy a house. Raemian La Classe, located in Gangnam-gu, was sold at a pre-sale price of 1.6 billion won last year. As it was cheaper than the surrounding apartments by about 1 billion won, this apartment attracted many people for the lottery contract. However, as mortgage loans are restricted for houses over 1.5 billion won, people without 1.6 billion won in cash could not join the lottery contract even though they had fulfilled the standard for lottery contracts. Although people who want to purchase a house have the ability to repay the mortgage loans, if they do not have the initial capital, it has become impossible to buy a house.
The Way Real Estate Policy Measures Should Move Forward
Increasing the Supply of Quality Houses
In order to curb the soaring house prices, the government should pursue expanding the quality housing instead of oppressing the demand for housing. The government policy regarding the real estate market stabilization always focused on suppressing the demand for houses by increasing the comprehensive house holding tax or tightening the mortgage loans. However, these kinds of regulatory policies only showed temporary effectiveness, and there were some serious side effects caused by the regulation. Therefore, to fundamentally curb the rocketing prices of apartments, it is crucial to supply quality housing in the location that people want. However, it is impossible to satisfy the whole demand for housing in the center of Seoul, where the Han River is flowing. The government needs to widen its view toward Seoul-metropolitan cities and provide quality apartments in those areas. Quality housing means houses that include parks, libraries, and gyms in apartment complexes where people sincerely want to live. The government should supply more of these kinds of quality homes in Seoulmetropolitan cities, and this will attract people’s demand by the home itself.
|Quality Apartment Complex|
Reinvigorating Local Areas Through Movement of Business Entities
It is also essential to revitalize the local areas to disperse the housing demand in Seoul. The policy that could support business entities to move their companies to local areas is needed. Currently, the government is giving tax cuts for corporations that moved their company from Seoul to local areas. However, the current supportive policy is not enough to attract more companies to move their business entities from Seoul to local areas. Therefore, the government should expand the scale of the benefit and needs to add additional funding support to attract business entities to move their companies. Furthermore, along with the movement of major business entities, a policy that can foster the dispersal of concentrated power in Seoul is needed.
In order to curb the soaring apartment prices, the government is consistently enforcing regulatory measures. However, these regulations only have temporary effectiveness, and the side effects of the policy are continuously following up. Therefore, the government should focus on the fundamental issues of the real estate market and needs to expand a quality house supply and needs to disperse the concentrated demand of Seoul apartments by reinvigorating the local areas.
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