Rising Housing Prices in Major Cities and the New Town Effect [Choi Jun-young's Urban Pilgrimage]

Housing prices in South Korea have stabilized since the second half of 2021, but globally, prices continue to rise, especially in major cities. Since 2020, liquidity has expanded rapidly, but with central banks raising interest rates, liquidity began to shrink significantly in 2022, causing financial asset markets such as stocks and bonds to contract sharply. However, in many places, housing prices have only seen a reduction in the rate of increase, with the upward trend continuing. In the United States, housing prices rose by 19.1% compared to a year ago at the beginning of this year, and by more than 32% compared to 2020. Similar trends are observed in Europe and other regions.

Some raise concerns that the rise in mortgage interest rates could lead to a repeat of the 2008 subprime mortgage crisis. However, general analysis suggests that the possibility of a large-scale bubble like in 2008 is low due to strengthened lending regulations such as DTI and DSR. Nevertheless, even without a bubble, rising housing prices and rents are undoubtedly making life difficult for many residents in major cities, especially young people and low-income groups.

The common analysis worldwide is that this phenomenon is due to demand far exceeding supply. While demand itself is high, many major cities face stringent housing and urban planning regulations, which prevent the effective use of limited land resources within the city. The inability to meet demand with adequate supply is identified as the main cause of price increases. Recently, rising labor and material costs have further reduced supply, a trend common across the globe.

Recently, the World Economic Forum (WEF) proposed five solutions to address housing issues centered on major cities. The first is to relax zoning regulations and floor area ratios. The second is to allow more foreign workers to participate in construction sites to alleviate the labor shortage, a key factor in rising construction costs. The third is to provide fiscal incentives, including tax breaks, to stimulate supply. The fourth is to expand affordable public housing construction based on increased revenue through the expansion of commercial spaces. Lastly, the fifth is to allow more mortgage loans for homebuyers. While some of these measures may seem questionable from our perspective, the important point is that housing problems in major cities are no longer unique to specific countries but have become universal issues.

Domestically, large-scale housing supply plans, including the 3rd phase new towns, have been announced over recent years, and the newly inaugurated Yoon Seok-yeol administration is expected to continue the large-scale supply policy in the metropolitan area. However, it is necessary to review whether this supply will be sufficient to stabilize housing prices. While we believe that large-scale housing supply through new town construction has significantly contributed to market stability, a closer look reveals a somewhat different picture.

In the early 1990s, the volume of apartments built in Seoul and multi-family and multi-household homes was much larger than that of the 1st phase new towns, and this supply greatly contributed to stabilizing housing prices in Seoul. Alongside new towns, large-scale supply within existing urban areas was effective. For the 2nd phase new towns, the supply volume itself and the fact that the homes supplied during the 1st phase new town construction were within about 15 years of occupancy allowed demand to be divided and absorbed, which was a factor leading to price declines.

However, the recent situation has changed. Apartments supplied in the 1990s in Seoul and new towns are aging as they approach 30 years, accelerating deterioration, while purchasing demand is concentrated on limited new housing. Apartments supplied in the 1970s and 1980s have long been difficult to meet actual occupancy demand, excluding investment demand expecting reconstruction.

On the other hand, villas, which were once considered alternatives, have recently lost much of their appeal and are not effectively dispersing apartment demand. Everyone waits for new apartments in Seoul, but in reality, supply is occurring in the outskirts. Considering this situation, relying solely on supply volumes from new towns in the metropolitan outskirts may not be sufficient to stabilize the overall market.

Population concentration in major cities is a global phenomenon, and the concentration of high value-added industries in these cities increases the income of potential buyers. However, while existing housing is aging, new supply is constrained by regulatory conditions, which is also common worldwide. Discussions on housing supply mostly consider the number of existing homes as a constant and focus on how many new homes will be added. However, many existing homes are increasingly falling out of the choice set as they fail to meet buyers' standards, and this trend is accelerating.

To ensure continuous new housing supply in urban areas, it is essential to support rapid reconstruction and redevelopment through the improvement of related systems and regulations. Delaying projects due to price instability factors only increases overall market instability. A rational approach prioritizing reconstruction and renovation of apartments built before the 1990s, rather than the more complex reconstruction of 1st phase new towns, is needed.

Choi Jun-young, Legal Expert, Yulchon LLC