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[Editorial] A pile of regulations

Government unveils real estate steps again, but supply increase crucial

The government announced a set of real estate measures again Wednesday. The gist is strong depression of demand.

The measures aim at heading off the balloon effect and quieting the so-called “gap investment” frenzy.

The balloon effect refers to the way a balloon behaves -- expanding elsewhere wherever you squeeze it.

Gap investment involves purchasing houses with “jeonse” tenants, who rent houses by paying only a lump-sum deposit. The money is returned when the related contract expires.

If a person buys a house where a tenant lives on jeonse (a Korean style lease) contract, the buyer does not have to pay jeonse money to the seller. He has only to pay the difference or gap between the house price and the jeonse money, and can pay the jeonse deposit to the tenant when they leave.

For example, if an apartment is 1 billion won ($823,000) and a tenant lives there on jeonse money of 700 million won, one can buy the apartment if the buyer has 300 million won. Buyers can profit if they resell it for more than 1 billion won.

Gap investment was prevalent among jeonse tenants trying to buy their houses. Tenants can take out loans from banks on the security of their jeonse money and use the loans to make gap investments. Banks get back the loans from home owners when the jeonse contract expires.

Each time the government has unveiled measures, housing prices faltered briefly in a few southeastern districts of Seoul, referred to informally as Gangnam, which are viewed by the government as the epicenter of the home price surge. Then speculation moved elsewhere to unregulated areas around Seoul, but eventually it began to jerk up housing prices in the capital in a vicious circle.

This time, the government expanded regulated areas to most of the province surrounding Seoul and a few provincial cities. But it is questionable if the measure could block the balloon effect. Speculation may occur in unregulated areas.

The government has put a lot of effort into discouraging gap investments. It effectively banned jeonse loans for the purpose of gap investment in regulated areas.

This measure is to some extent understandable in light of the need to curb abnormally high housing prices in some Seoul areas. But tenants who have little to do with speculation may suffer. Cash rich people will be given more opportunities to profit from gap investments without taking out loans. It is questionable if this is a step for houseless households who want to buy their own residence.

The government also vowed to enforce a transaction permit system for houses in some Gangnam areas. Sale without a permit will be made invalid and subject to punishment. This goes beyond mere demand suppression and restricts the exercise of private property rights severely.

The latest measures are the 21st taken by the administration under President Moon Jae-in. Housing prices faltered for a while each time regulations were announced, but they would begin to rise soon after. This pattern has continued. As a result, the median price of Seoul apartments rose more than 50 percent over the past three years to top 900 million won. That many steps produced side effects of the spread of housing price hikes throughout the regulated areas and rapid contraction of transactions.

The government should have unveiled steps to increase supply in residential areas in high demand through reconstruction or redevelopment. But it moved in the opposite direction. It made it more difficult to reconstruct dilapidated apartments in Seoul. It also vowed to impose a heavy tax on unrealized development gains from the differences of house prices before and after reconstruction.

Policies to suppress demand in areas preferred by most people exposed their limitations. Concerns about supply stagnation have driven up competition for new apartments in Seoul, raising their prices prohibitively. Any measure can hardly succeed without market-friendly increase of housing supply. It is human nature for people to seek better living conditions and convenient locations. Demand suppression is not the right answer.