[Viewpoint] Why the Government's Perception of the Real Estate Market Is Wrong

Professor Changmoo Lee, Department of Urban Engineering, Hanyang University

During the process of resolving the conflict brought to the surface by the resignation of the Blue House secretariat, President Moon Jae-in's true feelings about the real estate market were unexpectedly revealed. As an expert, what is regrettable is that his true feelings seemed less like a balanced perspective filled with deep consideration and more like narrow beliefs.

Having experienced three years of real estate policy failures and the resulting decline in approval ratings, there was a faint hope that a shift in thinking might be possible. However, these unexpected remarks shattered that hope. It also felt like a prelude to the amplification of national conflicts to come.

The first controversy concerns the president's judgment on the current market situation. He claims that the housing market is stabilizing. According to subsequent reports, the source of this information is said to be the weekly apartment price survey conducted by the Korea Real Estate Board in Seoul.

South Korea is the only country that announces housing prices as a price index based on weekly price surveys. This means that the reliability of weekly price fluctuations is hard to guarantee. It is also difficult to determine whether the recent decrease in transaction volume and slowdown in price increases are due to the prolonged summer monsoon season or other factors.

Following the president's remarks, a relay of support from ruling party members claiming that apartment prices will continue to stabilize has ensued. However, it is now time to worry more about instability in the rental market rather than price instability in sales. Some experts argue that controlling prices will stabilize rents, but if other macro factors remain the same in the domestic jeonse (key money deposit lease) and monthly rent markets, a downward trend in sales prices acts as a factor accelerating the rise of jeonse prices and the shift to monthly rents.

In short, from the perspective of homebuyers, the appeal of gap investment provided by jeonse disappears, and from the tenant's perspective, during a price decline period, they tend to stay in jeonse while waiting for a price increase period.

We have already experienced during the Lee Myung-bak administration that despite the house-poor problem caused by falling housing prices, jeonse prices soared and the proportion of monthly rents increased sharply. Analyzing nationwide labor panel data with long-term time series comparability shows that the share of jeonse among rental contracts decreased by 15 percentage points from about 65% in 2008 to 50% in 2017. Among deposit-based monthly rents, the share of contracts where the deposit is less than 20% of the jeonse deposit increased by 15 percentage points from 10% to 25% of all rental contracts. This rapid monthly rent shift contradicts the claim by Minister Kim Hyun-mi of the Ministry of Land, Infrastructure and Transport that landlords lack financial assets to return deposits and thus monthly rent conversion would not be fast. At this point, with factors accelerating monthly rent conversion such as a sharp increase in holding taxes on multiple homeowners and the rent ceiling system for jeonse and monthly rents, there is great concern about how unstable the apartment jeonse and monthly rent market will become.

Another heated controversy is the sudden proposal to establish a real estate market supervisory body. I was surprised in two ways. One is that there is still a belief that the current market situation is the work of speculators crossing the line of illegality. The other is that the related departments are only concerned with how to quickly follow orders without any criticism. Although speculation became the focus of controversy during the period of rapid price increases, in the upcoming market downturn, there is a high possibility of a hard landing under the currently tightened regulations. I am curious about what the function of this permanent body will be during such a period. Rather than continuing a speed race immersed in short-term market conditions, I wonder if it is too much to hope that the related departments will show an independent evaluation and judgment that the public can accept regarding the president’s proposal to establish a real estate supervisory body, as well as a coordination process with the president.

Chang-Moo Lee, Professor, Department of Urban Engineering, Hanyang University