Policy Alternatives to Enhance the Real Estate Market in Korea
The fundamental problems of the Korean real estate market stem from privatization, urbanization and merchandising. Due to the failure of reformation of farm land and the state planned rapid economic growth, 70% of the national land was privatized, and the industrialization and urbanization processes caused real estate investments to become speculative in nature. In the past 20 years, 25% of the Korean population changed residences as real estate properties were traded like manufactured goods. These processes increased income disparity, and increased the Gini coefficient to 0.7% which deepened distrust and dissatisfaction among various social stratums. The public opinion was split on the issue of whether real estate transactions should be seen as speculations or investments. Real estate had earned the reputation of socially unappreciated means of investments.
Following the financial crisis, there have been drastic changes in paradigm. Due to confusion regarding policies and various social phenomena such as the aging population, the retirement of baby boomers, etc., demand for residential properties has been decreasing, creating downward pressure on their prices. As people have been choosing to rent instead of buy, demand and rental prices for residential rental properties, especially for one or two person households, have risen significantly.
Furthermore, the decrease in real estate transactions has depressed real estate related businesses, causing asset deflation and heightening a chance for the economy to land hard. Insolvencies in savings and loans banks have also intensified the problems in the real estate market. In order to promote the supply of rental residential properties, the social discrimination against multi-residential property holders must diminish and government policies encouraging super rental companies are necessary.
Public companies such as the Land and Housing Company have deteriorated in terms of their financial positions because they have born all financial burdens for supplying residential properties according to government polices without properly analyzing demand. Under this administration, the Bogumjari project, which was to supply low income families with apartment units at lower prices than in markets, caused privatization of the profits from the project as the units were built in preserved areas for environmental purposes which are much lower in price. The project has been criticized for the encroachment on private markets and for the unfairness due to unclear policies regarding qualification requirements for residents and evacuation criteria, etc. Subsidizing payments for rental costs of low income families can work better as a policy option.
The most urgent issue is to restructure the construction industry which consists of 13,000 construction companies, and 60,000 companies specialized in residential properties. Without properly restructuring these companies, the insolvency concern will linger, hindering the heathy recovery of the real estate market. It is imperative to promote co-development based on cooperation among large conglomerates and small and medium sized companies for big projects abroad.
F urthermore, to facilitate the changes in the social environment, real estate policies should be able to embrace macro issues such as climate change, demographical changes, globalization, etc.
We must focus on implementing trustworthy policies which effectively balance and coordinate public and private needs as well as the functions of the government and the market.