[In-Depth Review] Expecting Growth Potential in Urban Housing Supply

Jin Mi-yoon, Head of LH Housing Stability Research Center

The level of new housing supply in our country is truly world-class. While the average number of new housing units built per 1,000 people in OECD member countries is 4 to 5 households, Korea’s figure is 10 to 11 households. The global average ratio of new construction compared to existing housing stock is 1%, but Korea’s is 2.3%. Even considering the three years immediately following the global financial crisis when supply was somewhat sluggish, the capacity to supply an average of 500,000 households annually over the past 30 years has made a significant contribution to job creation and economic growth.

The public land development method, which has been the main foundation for housing construction so far, is a Korean-style state-led development model that has supplied large amounts of land quickly and cheaply to respond to urbanization and industrialization. It gave birth to the first and second generations of new towns, and now the third generation is being prepared. Over its 40-year history, even today, about half of the houses built annually still depend on public land development. However, we cannot remain at this stage. Amid the era’s challenges of low growth, high unemployment, low birth rates, aging, and polarization, cities and housing are now entering a stage of low productivity and aging.

One solution is to increase supply within urban centers. Many countries that have already experienced urban growth and decline, as well as building and housing aging, are promoting inclusive development that combines floor area ratio bonuses with public contributions. The so-called social mix-type inclusive zoning system began in 1971 in Fairfax County, Virginia, USA, and is currently being implemented in 866 areas across 25 states in the US. The application methods vary somewhat by country or region. In countries like the US and Australia, supply is premised on government incentives such as floor area ratio bonuses, financial support, and relaxation of building regulations, whereas the European model mandates only public contributions without separate incentives. The commonality is that public contributions require a mandatory supply of affordable housing, including public rental and public ownership, at a certain ratio. This ranges from as low as 10% to as high as 40%.

Having an agreed formula minimizes conflicts. Supply skeptics argue that increasing supply will not stabilize housing prices. They believe that building more will attract more demand, offsetting the price reduction effect from additional supply. They also point to gentrification as a problem, where rising housing prices and rents push residents to other areas. These are concerns that deserve attention. However, despite these debates, empirical evidence mostly shows otherwise. Increasing housing supply within urban centers alleviates the housing cost burden for low- and middle-income groups, and public contributions are undoubtedly an important mechanism that protects affordable housing from volatile markets. To enhance effectiveness, it is recommended to implement on a large scale rather than small scale, and under a mid- to long-term plan, coordinated and responsible delivery systems among multiple stakeholders determine success or failure.

Urban housing supply in Korea has just opened a new path through public redevelopment. To travel the long road faster, it is essential to first create standardized formulas and successful cases. Not only redevelopment and reconstruction but also finding and investing generously in idle vacant houses, aging buildings, and factories within urban centers for customization, diversity, and affordability is important. When houses are revived, cities thrive. In 2004, Dr. Kate Barker, who advocated for expanding housing supply to the UK government, proposed in 2019 a redesign of housing policy with this advice: “There is no perfectly functioning housing market anywhere. However, public intervention improves market structure and acts as a buffer for housing prices. (Omitted) The rate of increase in housing supply should be at least higher than the city’s employment growth rate.” This highlights how crucial the role of housing supply is for job creation and maintenance.

Jin Mi-yoon, Director of LH Housing Stability Research Center