Government`s Policy Failed to Stabilize Housing Prices

The government introduced a new system in July 2003 to sell reconstructed apartments after construction was completed in an attempt to stabilize housing prices. However, a study now shows that the policy instead put a heavier burden on buyers who do not belong to the apartment’s homeowners associations prior to its reconstruction.

The Residential Environment Institute released yesterday that a problem exists in the cost analysis for expenses spent on a 2,177-unit apartment complex in Gangseo-gu, Seoul, which began reconstruction in 2003.

The government launched the apartment sales system in an effort to reduce demand for reconstructed apartments, to put a cap on price increases for apartments slated to be reconstructed, and to stabilize prices of nearby apartments. However, this policy failed.

○ Heavier burden on buyers

According to the research, the apartment complex’s homeowners association calculated the combined price of its 773 units which were designated to be sold to buyers outside of its association at 166.42 billion won. When the association estimated its 2003 expenses, it included in its costs the market price for apartments in the vicinity.

However, the combined price of the 773 units, which are to be sold in the first half of this year, are now estimated to be worth 386.5 billion won.

Apartment buyers who do not belong to the homeowners association are required to cover the additional 270 million won while each association member is to earn an additional 146 million won, even after the financing cost of 15.26 billion won is included.

Kim Tae-seop, head researcher of the think tank, noted, “As housing prices have soared since 2003, association members investing in the reconstruction project will earn money while buyers outside of the association will face a heavier burden.”

○ Soaring housing price due to a lack of supply

The government initially expected the new apartment sales system to reduce reconstruction projects, thus stabilizing not only the price of apartments subject to reconstruction in southern Seoul but also housing prices overall.

But contrary to the government’s expectations, apartment prices have soared in Seoul since February 2003 when the Roh Moo-hyun government took power. According to real estate information provider Speedbank, housing prices have increased 43.04 percent in Seoul while prices have soared a whopping 64.3 percent in Gangnam-gu, Seocho-gu, and Songpa-gu where apartments slated to be reconstructed are heavily concentrated.

Experts point out that a series of government regulations regarding apartment reconstruction have been obstacles to meeting housing demand in southern Seoul, thus creating sky-high real estate prices. Speedbank reported that the number of apartment units for non-association members drastically decreased from 7,015 in 2004, to 879 in 2006 and 538 in 2007, after the government’s apartment sales system came into effect.

In a recent phone interview, former Construction and Transportation Minister Choi Jong-chan said, “If the government wants to stabilize housing prices, it should increase supply. If it cannot provide housing immediately, it should allow construction companies to parcel out before construction. The apartment sales system which delays supplies cannot be a good measure to control housing prices.”

mint4a@donga.com jefflee@donga.com