[Backlash from Distribution System] 'Lotto Subscription and Supply Contraction' Side Effects Continue... "Need to Consider Improvement Measures"

Price Ceiling on Sale... Supply Contraction, Lotto Subscription Side Effects
Good Intentions to Help Low-Income Homebuyers but Opposite Effects
Leave Pricing to Market, Government Should Minimize Regulation

Apartment complexes in Songpa and Gangnam areas as seen from the 'Seoul Sky' observatory at Lotte World Tower, Jamsil, Songpa-gu, Seoul [Image source=Yonhap News]

As controversies over the 'Lotto-priced' pre-sale prices and resulting project delays continue to emerge, the government unveiled a revised plan for the private land pre-sale price ceiling system (pre-sale price ceiling system) earlier last month. However, the industry still evaluates that it is insufficient to resolve the side effects of the pre-sale price ceiling system. Conflicts over pre-sale price regulations persist in major reconstruction sites in the metropolitan area, and the damage caused by 'Lotto subscription' remains ongoing.

Experts unanimously agree that the side effects outweigh the benefits of the pre-sale price ceiling system, and it is time to discuss more concrete improvement measures. It is suggested that the pre-sale price ceiling system continue to apply to public housing supplied at low prices by the government, while private land should be left to market autonomy. Additionally, the reintroduction of the bond bidding system, whose necessity has been steadily raised, is also being considered.

According to the real estate industry on the 9th, the Moon Jae-in administration introduced the private land pre-sale price ceiling system in July last year, but until the first half of this year, apartment prices in Seoul and the metropolitan area continued to rise at an unprecedented pace. The government's confident claim that it would help stabilize the market by pulling down surrounding house prices has become meaningless. Recently, the rise in house prices in the outskirts of Seoul has stopped, and the market is somewhat stabilizing, but many analyses attribute this to loan regulations by financial institutions rather than pre-sale price regulations.

On the contrary, the market points out that the pre-sale price ceiling system guarantees excessive capital gains to a small number of successful applicants, increasing the relative deprivation of many non-homeowners. Since the pre-sale price is set at about half the price of nearby complexes, winning the lottery guarantees capital gains of several hundred million won, spreading the perception of 'just apply first.' This has narrowed the door to home ownership through subscription competition. A representative from the pre-sale industry said, "Since the pre-sale price ceiling system, the subscription market has turned into a speculative market expecting capital gains," calling it "virtually a lotto market."

In fact, foreign countries such as Singapore rarely have private pre-sale price regulations like those in Korea. Doosung Kyu, Senior Research Fellow at the Korea Research Institute for Construction Policy, said, "While Korea's housing design and quality have greatly improved, the pre-sale price ceiling system does not adequately reflect this and uniformly restricts prices," adding, "There are criticisms that the pre-sale price ceiling system is a backward institution."

Therefore, the industry voices that the pre-sale price ceiling system should be abolished for private land and price determination should be left to market principles. Even if suppliers set excessively high pre-sale prices in the short term, if the government faithfully implements supply measures, market participants will find appropriate prices through supply-demand principles.

If abolishing the pre-sale price ceiling system is not appropriate, institutional measures such as the housing bond bidding system need to be established. The bond bidding system requires buyers to purchase national housing bonds when apartment pre-sale prices are excessively lower than surrounding market prices, and large capital gains are expected. This system recovers part of the capital gains. The proceeds from bond sales can be used for constructing public rental housing for vulnerable residents.

The bond bidding system was previously applied to the sale of medium- and large-sized apartments in Pangyo New Town during the Roh Moo-hyun administration in 2006. Although the government recognizes the drawbacks of the pre-sale price ceiling system, it has been known to hold a somewhat negative stance on introducing the bond bidding system, which increases the burden on buyers, as it has maintained the policy of selling new homes to non-homeowners at affordable prices.

Jo Joo-hyun, a professor in the Department of Real Estate at Konkuk University, said, "To solve the current problems in the housing market, excessive regulations like the pre-sale price ceiling system should be removed and the market should be entrusted, while the government should establish minimal regulations for low-income groups," adding, "Regulations inevitably reduce the volume of pre-sale housing in the long term and cause fairness issues."