[Robert J. Fouser] Slowing the rise in home prices
Articles on the housing market in the South Korean media are frequent and focus entirely on two topics: cost and scandal. Cost concerns the steady rise in prices, both for buying and renting. Scandal concerns the various tactics that the rich and powerful use to profit from real estate. The thread running through the media’s interest in cost and scandal is that owning a home is critical to building and accumulating wealth.
Since taking office in May 2017, the Moon Jae-in administration has tried a series of measures to control rising housing prices. Most of the measures have focused on restricting loans and increasing taxes as ways to cool the housing market. None of these measures have worked and housing prices continue to climb. In the first eight months of 2021, prices in Seoul and surrounding areas rose 13 percent, the fastest increase in 15 years. The average apartment in Seoul now costs about $1,000,000, which equals 18 years of the median household income. In 2017, the average apartment in Seoul cost only 11 times the median household income.
Most developed countries around the world are facing similar problems. Though local conditions vary, supply and demand, the most basic of economic principles, is key. Housing prices in the US, for example, has risen sharply in recent years as demand outstrips supply across the country. The large millennial generation is now looking for starter homes, creating intense competition in many large metropolitan areas. Rising construction costs have reduced the supply in many of these same markets.
In South Korea, the relationship between supply and demand is complex. Construction of apartments continues across the country. Redevelopment continues in cities, despite ongoing controversies, and areas around cities continue to fill in with new construction. At the same time, the population of people entering buying age continues to fall as the population ages. These conditions should indicate a weakening of upward pressure on housing prices, but the opposite is happening.
The problem in South Korea is not the amount of supply and demand, as in the US, but its location. The pull of Seoul remains strong, and the supply of housing cannot keep up. People who cannot buy in Seoul end up in Gyeonggi Province or Incheon, boosting demand in these areas as well. Prices are lower because these areas are easier to develop, but steady demand keeps prices rising.
The failure of efforts to control the housing market over the past five years suggests that the next administration should try a different approach. That should start by taking a long-term view of demographics. As the population ages, the number of younger home buyers will decrease, and seniors will eventually move out of larger apartments. The overall population dropped for the first time in 2020 and the drop will accelerate toward the end of the decade and beyond.
Demographic changes suggest that supply and demand will move closer toward balance over time. In the short term, policy makers need to focus on increasing supply in Seoul where demand is greatest. This runs against the long-standing policy of discouraging growth in Seoul, but that policy has little to show for itself.
Seoul is already a large, densely populated city, but it could hold more. Manhattan, for example, has 29,000 people per square kilometer compared to Seoul’s 16,000. None of the 25 districts in Seoul are as dense as Manhattan. Gangnam District, which is famous for apartments, has very dense areas, but overall density is only 13,700. If Seoul had the density of Manhattan, its population would increase by about 8,000,000 people. Increasing the population density to 20,000, a level already found in some districts, would increase the population by 2,500,000.
To increase supply, policy makers need to make it easier to build at higher density. They also need to encourage of the development of housing that meets new demographic needs. Seniors, for example, may want to move to communities that cater to seniors as they downsize from larger apartments. Single people and childless couples might find smaller apartments at lower prices more appealing.
Frustration over the cost of housing is rapidly becoming an important political issue around the world as younger generations make their dissatisfaction known. In South Korea, real estate scandals have always attracted more attention than concerns about cost. That may change after five years of sustained price increases and ineffective regulations. Candidates for president would be wise to have workable plans for addressing this issue. Robert J. Fouser
Robert J. Fouser, a former associate professor of Korean language education at Seoul National University, writes on Korea from Pawtucket, Rhode Island. He can be reached at email@example.com. -- Ed.