Is There Really a “Glut” of Housing in Korea?
by Brendon Carr
As a follow-up to my earlier blog entry ”Housing Policy and the Korean Dream” (which, incidentally, has been the most popular Korea Law Blog entry so far—and by a large margin), a story in the JoongAng Daily last week seemed like a mild rebuttal. It seems while the bubble in Seoul has ballooned up large, a housing “glut” of unsold apartments has developed across the country. Apparently there are more unsold apartments now than at any other time since the so-called IMF Crisis.
But, Brendon, you told us that the problem was a shortage of housing. Are you full of it?
Well, sure I am, but still… The JoongAng gives us two hints what’s going on, both of them predictable consequences of Roh administration policy choices:
First, at the same time the government was tightening up on development (and especially re-development) in Seoul, development of apartments in provincial cities was encouraged in order to “revive the regional economy”. This development seems to have outstripped the demand for apartments in these areas, or the ability of relatively less-prosperous provincial residents to buy apartments. And this even though the prices of apartments in these regions tend to be below five million Korean won (W5,000,000) per pyong (3.3 sq. m., or 36.4 sq. ft.) as opposed to the average price of 16 million Korean won for the same space in Seoul.
The apartment glut seems to be worst in Taegu, whose regional economy continues to be hit hard by the collapse of light industrial manufacturing in Korea, especially the textile industry (12,489 apartment units unsold); Pusan (9,212 units unsold); and South Kyungsang Province, which surrounds Taegu and Pusan and includes the city of Ulsan where Hyundai has its heavy manufacturing (12,072 units unsold). The other area named in the JoongAng story is South Chungcheong Province, which includes Taejon and (coincidentally, I’m sure) Kongju, the site of the future “capital” of Korea (11,245 units unsold). Together, these places outside of Seoul have 45,018 units unsold, or over half the nationwide total. According to a related story in the Dong-A Ilbo’s English edition, 94% of the unsold inventory is outside Seoul, where there is little demand.
The other factor driving the spike in unsold apartments is the result of pure idiocy. In an attempt to control short-term increases in property prices, the Roh government reinstated the bad old policy of price controls to take effect from September 2007, with the predictable effect:
“Construction companies tried to get rid of a large number of new apartments to get around state-imposed limits on apartment prices, even though there were already many apartments unsold,” Kim Sun-dock, the head of the Construction and Economy Research Institute of Korea, said yesterday.
The Roh administration has implemented a “price ceiling” on new apartments for sale after September 2007. This price ceiling in Seoul is, I understand, W600 million—after September no new apartments may be offered at a price higher than this. In the provinces it will be lower, but still not matched to market reality. So the construction companies dumped their inventory-in-progress onto the market while they could still freely set prices. Paradoxically this sudden oversupply makes it more likely prices will fall.
The price-control policy is bad for two reasons. First, controlling the price and enforcing artificial limits on profits (construction companies are now required to disclose their costs, and may only take a “reasonable profit” dictated by their local government) tends to enforce a uniformly low quality level.
Anyone who compares the Soviet-style quality level of apartments constructed before 1999, when the price ceiling system was abolished, and the quality of apartments constructed lately can see the difference in style, fit and finish. Newer apartments are a lot better—the free market encouraged competition on the basis of quality, and the construction companies which promised and delivered a “quality” experience were able to command higher profit margins. The Roh gang of crypto-Communists abhors this outcome. They prefer us all to be poor together, huddled together in small, unimaginative and shoddy apartments sold for an “appropriate” profit margin by construction companies doing the bidding of the government—so that nobody feels left out.
But there is another, more-serious side effect of controlling prices of a shortage good: It encourages corruption, and creates windfall profits for persons with connections and a few lucky others. Allocation of housing used to be done by a “lottery” system (there still is an element of this, but it used to be quite pronounced) where people hoped against hope to get their apartment application chosen. Why? Because with the price control, “winning” a new apartment guaranteed a windfall profit when the apartment could be sold onto the secondary market at the real market price.
Predictably, relatives and friends of government officials ("lending their names” as proxy for officials) would “win” the lotteries for the shortage good with distressing regularity, and were able to line their pockets in this way. An extreme modern example of this is Robert Mugabe’s Zimbabwe, where government officials can buy US dollars at the official exchange rate and then swap them on the black market for a quick, and insane, windfall. Now, I’m not suggesting that Roh is going to throw the economy into a Zimbabwe-style disaster, but just as a practical question—since there is zero chance Roh and his gang can get re-elected, why would they reinstitute a system like price controls and housing rationing?
As for whether Korea Law Blog is off-target with its prescriptions for how to solve the housing issue for the benefit of Korea’s citizens, which are to build more housing in the areas where Koreans want to live (namely, Seoul, and in particular the Kangnam area), and of the quality standard in which Koreans want to live (apartments larger than a shoebox with nice appliances and wood flooring), according to a report I found today it seems the rest of the OECD agrees with me. But perhaps their bourgeois sensibilities are interfering with class consciousness.
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Hi Brendon,
This is interesting - in Australia here, we’re going through something similar-yet-different.
A property boom is putting real estate out of the reach of an entire generation of Australians.
At the same time, there are queues of people wanting to inspect properties for rent.
This is probably being caused by (among other things) Australia’s national past-time of real estate speculation, coupled with a skills shortage (mainly a lack of skilled tradespeople - partially caused by poor education planning, partly by the incredible pay these people can receive working on mines in Western Australia).
Land isn’t something we have in short supply - but housing is.
Interesting paradox, isn’t it?
-John
Hi Brendon,
I’m just trying to learn more about the Korean housing market, which seems to be a mix of severe government intervention with a desire for a free market? Or, actually, maybe I’m just imagining the free market part. Regardless, I feel like the previous government lacked the backbone to deregulate, which is something that should be obvious, no?
Anyway, you write that the lottery system is not as pronounced? My understanding is that all new apartments are sold, by law, through the lottery system that requires 1 of 3 “special accounts.” Did all apartments, new and old, used to get sold by lottery?
Also, what do you think about Jeonse? Now, I’m against government intervention when unless necessary, but I think the government should begin efforts to eliminate it. It just seems like an anachronistic practice that (1) takes away all the good things about a real rental market (putting down 50% of an apartment’s value is not my idea of a rental), and (2) it puts all the risk with the tenant.
In any case, if you get a chance to comment, I would be grateful. Your blogs are very helpful and I hope you continue to write them.
Best,
Josh
Thanks for reading, Josh. What I was getting at in the comment about the “lottery” was the confluence of limited supply plus price control at the primary market meant a “competition ratio” of hundreds or thousands of applicants vying for the same unit. Getting one’s number drawn ensured an immediate windfall.
Since the price of apartments was liberalized, the competition ratio has declined substantially—although there still are multiple applicants for certain apartment developments—and the windfall profits from being chosen have more or less disappeared.
Sale on the secondary market has always been unregulated.
As for whether the government ought to intervene to abolish cheonsei (my romanization preferences were hardened in the early 90s), since my thesis is that government intervention in this market has generally been harmful, I don’t recommend intervention to prefer wolsei monthly rentals over cheonsei. Liberalize the market, and let the market decide. I believe that most Koreans prefer cheonsei, all other things being equal.