[Election 2022] How Moon’s failed housing policy impacted election

SEJONG -- A series of failed policies by the Moon Jae-in administration to tame South Korea’s housing market has been at the center of the presidential election this year, with candidates taking housing-related schemes to the fore of their campaigns.

It is obvious that housing policy will be included in the first batch of to-do lists by President-elect Yoon Suk-yeol, as soon as he forms a transition committee.

Should the policy be prioritized, the lesson learned from incumbent President Moon’s failure and the repercussions it sent throughout the market should make the new leader consider his options carefully, according to experts.

It will also take some time to see an actual change in the market, as most of the campaign pledges -- such as easing tax burdens or lifting regulatory measures on the reconstruction of apartments -- will require the new administration to seek revisions to the law. The process itself is lengthy, but it is further complicated by upcoming local elections in June, where the new heads of municipalities who are key decision-makers for regional redevelopment plans will be picked.

“Debates on the expansion of housing supply and deregulatory measures will resurface before and after the June 1 local elections. It remains to be seen whether the new president (Yoon)’s push for deregulation will be in tune with new governors and city mayors,” said a real estate agent in Sejong.

“The possibility of the new central government clashing with municipalities over new housing measures exists, which could throw the market into another state of chaos.”

Some real estate agents and observers also raised the possibility that deregulations involving mortgage terms in the next administration’s early-term could invite speculative investments again, which would stimulate the market despite supply schemes.

Doo Sung-kyu, a former research fellow of the Construction & Economy Research Institute of Korea, was quoted by a news outlet as saying, that he forecast prices to climb on a short-term basis. “Home prices will climb in the latter half of this year as demand still outstrips supply,” he said.

In a research report, Real Estate 114 also said “expectations over reconstruction and redevelopment are growing on the back of the electoral pledges, and Seoul's resoluteness toward active home supply.”

The hot potato

Real estate has been among a few key sensitive issues for South Korean voters in major elections over the past few decades. It is an issue that could even determine the winner.

Voters did not hesitate to cast their ballots for political parties or candidates who had pledged for a sufficient supply and stabilized prices for housing. Most Korean households wish to purchase an apartment at reasonable prices. According to Statistics Korea’s data, some 42 percent of Koreans do not own their residence.

The Moon government argued that homeowners could see losses as its policy would eventually pull down property prices.

Their confidence toward stabilization had let many households dispose of homes or delay their purchase timing. Many changed to tenants from homeowners in the second half of 2017 and 2018.

The administration, led by the Land Ministry and the Finance Ministry, had unveiled a series of “anti-speculation measures” nominally between 2017 and 2019.

The measures were aimed at issuing a variety of regulations in the market. For the supply segment, policies were mainly focused on building long-term rental apartments, instead of providing new apartments via reconstruction and redevelopment in Seoul and major cities in Gyeonggi Province.

Policymakers tightened mortgages in terms of loan ceilings and requirements, continuously criticizing the 2013-2017 Park Geun-hye administration’s policy to boost the economy by vitalizing the real estate sector. The ceiling, or loan-to-value ratio, was zero in some pricey areas in Seoul, which meant blocking the home purchase via mortgages.

The government also simultaneously raised the capital gains tax for home sellers. This brought about a situation where the demand for homes from potential homebuyers far exceeded the supply of potential sellers, as more and more owners gave up trading their properties.

The supply shortage led apartment prices in the Seoul metropolitan area including Gyeonggi Province and Incheon to surge starting from 2019. Nonetheless, President Moon said that the administration still had confidence in curbing home prices.

Repeated failures

Though the liberal-leaning government, spearheaded by market reformists unveiled further real estate policies, including building apartments by designating “new towns” in some areas of Gyeonggi Province, it took a lukewarm stance toward increasing supply in Seoul via reconstruction or redevelopment.

This triggered the deepening price gap between Seoul and outside Seoul, and between the pricey Gangnam area and non-Gangnam area in Seoul.

Regardless of the gap by region, Korea underwent a nationwide surge in home prices. This was led by a greater willingness to take risks among young people in their 20s and early 30s who felt a sense of urgency that home prices may continue to rise faster than their income growth.

Despite the pandemic, which began in early 2020, the average trading price of homes in Seoul and some major cities surged by 100-150 percent between 2017 and 2021. An increasing number of people deemed the real estate policy under the incumbent administration a “failure.”

Asking prices at an apartment complex in Seoul’s Banpo-dong hovered between 3.5 billion to 4 billion won ($2.8 million-$3.2 million) for an 84-square-meter unit this year. These prices were about 1.6 billion won in 2017 and 700 million won in 2014.

If a household seeks to buy a similarly sized apartment with 700 million won this year, it would have to consult real estate agencies at satellite cities or provincial cities, not in Seoul. There are few apartment units at such prices in any of the 25 districts in the capital, which even frustrated a certain portion of former Moon supporters.

While skyrocketing prices might be welcomed by some homeowners, the simultaneous rise nationwide has made it difficult for them to move to other complexes in the same residential areas after selling old apartments “due to heavy capital gains taxes.”

During the latter part of his tenure, a sharp hike in the comprehensive real estate tax has fanned the fury of homeowners. They have been saddled with a dual tax burden in addition to the rising property tax.

In 2020, Korea ranked No. 2 among the 38 members of the Organization for Economic Cooperation and Development in the ratio of property tax to gross domestic product. This figure reached 3.97 percent, while the nation’s ranking stood at No. 6 in 2019.

Hopes building

With the market stuck with a supply shortage, heavy taxes, and rising interest rates, Koreans are pinning hopes on President-elect Yoon scheduled to take office on May 10 to bring a significant change.

In particular, attention is being focused on mortgage rules and whether the new administration will ease the ceiling in the coming months for the active trading of homes on the market.

Some critics advise that Yoon's presidential transition team not rule out unveiling a risk management plan in its policy directions. A brokerage-based analyst in Seoul said, “As the interest rates are rising internally, reckless deregulation could be a poison to the household sector and the overall economy.”

By Kim Yon-se (kys@heraldcorp.com)