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Intervention in realty market has more to lose than gain
The government appears set to introduce price ceilings on apartments built by private contractors. "It is time to consider applying price limits to apartments constructed by private builders," Minister of Land, Infrastructure and Transport Kim Hyun-mee told the National Assembly, Monday.
The price ceiling on new apartments is the Moon Jae-in administration's trump card to curb home prices. The government has been readying itself to use it at the slightest sign of a resurgence in housing prices. Minister Kim seems to have decided the time has come. Apartment prices in Seoul have begun to rise recently despite the government's strong anti-speculative measures taken last September.
We doubt, however, whether it is right for the government to determine the prices of privately built apartments. Under the price ceiling system, the government decides flat prices based on the actual price paid by contractors for land purchases, basic construction costs and other necessary expenses. The system is bound to pull down apartment prices sharply. However, it also works to reduce the supply of homes and lower the quality of construction. Private builders want to make profits. If the government shackles them with home prices, the contractors will either give up building homes or use cheap materials.
The system has its roots from a point of view that does not regard real estate as a market but judges it in terms of ethics. From that standpoint, rent gained from property is viewed as unearned income, i.e. evil. So the incumbent leftist government is trying to curb property prices at all costs. The harder the government tries, however, the higher the home prices rise, like a whack-a-mole game.
As seen in the controversial minimum wage hikes, the Moon administration sticks to a noble cause rather than facing reality. The same is true with its real estate policy. It ignores market principles under the pretext of controlling home prices. Former President Kim Dae-jung said politicians and administrators should have both the critical minds of scholars and the reality check of merchants. The attempts to curb apartment prices built by private contractors are unrealistic even by the academicians' way of thinking.
