[Insight & Opinion] Regret Over the Re-designation of Land Transaction Permission Zones

Policy Reversal of the Land Transaction Permission System Raises Distrust
Lack of Effectiveness and Balloon Effect Also at Issue
Unintended Consequences of Policy Must Be Reconsidered

In the 19th century, American economist Henry George advocated for unifying all taxes into a single land tax and abolishing other taxes. His argument that land tax could curb real estate speculation and cover fiscal expenditures was never realized. The concept of public land ownership acknowledges the private ownership of land but allows for regulation in the interest of the state.

The Constitutional Court stated that land ownership rights are not absolute and may involve obligations or restrictions for public interest or the promotion of public welfare. Nevertheless, laws embodying the spirit of public land ownership, such as the "Land Ownership Limit Act," "Excess Land Gain Tax Act," and "Development Profit Recovery Act," were halted by the Constitutional Court. Regarding the Land Ownership Limit System, it was judged unconstitutional for excessively infringing on constitutional property rights.

In response to signs of a sharp rise in apartment prices in Seoul, the government re-designated the Gangnam 3 districts?Gangnam, Seocho, Songpa?and Yongsan area as land transaction permission zones. In 2020, under the previous administration, Jamsil, Samsung, Daechi, and Cheongdam neighborhoods were first designated as land transaction permission zones due to MICE development projects and the Yeongdong-daero complex development project. After five years, Seoul City lifted the designation amid many complaints that it infringed on freedom of residence and property rights. Now, citing a surge in real estate prices, Seoul City re-designated these zones just 35 days after lifting them, causing much confusion and apologizing for creating policies lacking trust. Several issues are analyzed below.

First, the land transaction permission system was introduced in the late 1970s to curb a real estate speculation boom. It was intended to prevent speculation when agricultural land was developed into new towns or large-scale housing sites. The system was introduced because land value was expected to surge when land use designation (jimong, 地目) changed due to large-scale development plans. Contrary to this original intent, implementing a housing transaction permission system due to a surge in real estate prices is not a straightforward approach. Moreover, expanding the designation from neighborhood units to district units (Gangnam 3 districts, Yongsan) may infringe on individuals' property rights and freedom of residence. Residents in areas where housing prices have not risen at all were hit hard.

Second, there is no effectiveness in stabilizing real estate prices. Apartment complexes designated as land transaction permission zones in 2020 were already popular and continued to record new highs despite an overall slump in real estate transactions. The government or local authorities merely highlight these areas as popular by pinpointing them. The transaction freeze caused by the withholding of listings only reduces real estate transaction tax revenue. Designating land transaction permission zones leads to a "balloon effect," driving up housing prices in neighboring areas. It is said that Banpo recorded consecutive new highs because it was not included in the previous land transaction permission zones. Now, with Mapo-gu and Seongdong-gu rising, they are also being designated, showing the policy thinking is excessive.

Third, lifting the designation at a time when interest rates are falling shows serious problems with the policy makers' decisions. The Governor of the Bank of Korea lowered the base interest rate in February, expressing concern that money would flow into real estate. If the designation had been lifted during the 2022 Legoland incident, the criticism might have been less severe. Regulations often cause paradoxical effects. Since real estate is always a hot issue, policies must be handled carefully, considering timing.

The government adjusts loans according to the real estate market. It would be more desirable to ban jeonse (long-term lease) loans (excluding vulnerable groups) to reduce gap investments. Gap investment is the main culprit driving up housing prices. What if homeowners were only allowed to buy additional houses as monthly rentals? The previous administration's real estate measures gave rise to the popular phrase "one smart house," attracting money nationwide to popular areas. It is hoped that the problems of policies that concentrated investment into "one smart house" will be addressed.

Jo Won-kyung, Professor at UNIST and Director of the Global Industry-Academia Cooperation Center