[How Is Your Dream] Choi Jong-chan "Real Estate Policy Failed... Market Distrust, Government Overconfidence"

Interview with Choi Jong-chan, Former Minister of Construction and Transportation

Real Estate Policy Failure... Devastating Results
If Everything Could Be Solved by Regulation
No Country Would Fail Economic Policy
Focus Public Rental Housing on Low-Income Groups
Recoup Subscription Gains to Build Rental Housing

Choi Jong-chan, Former Minister of Construction and Transportation

[Asia Economy Reporter Moon Jiwon] "The government's real estate policy has failed. The results are disastrous, no matter who looks at it."

Choi Jongchan (70), former Minister of Construction and Transportation (now Ministry of Land, Infrastructure and Transport) who led the ministry during the first participatory government, strongly criticized the government's real estate policy failure in a New Year's planning interview with Asia Economy on December 29 last year, saying it was "the result of distrust in the market and overconfidence in the government." His diagnosis is that the cause of failure was excessive confidence that housing prices could be controlled through regulations while ignoring the principles of capitalist market economy.

Former Minister Choi said, "If the goal is to stabilize real estate prices, policies should be made based on the principle that demand decreases and supply increases," and pointed out, "If you think everything can be solved by regulation, then no country in the world would have trouble with economic policy." He said that the two lease laws such as the right to request contract renewal and the rent ceiling system, as well as the pre-sale price ceiling system and excessive regulations on multiple homeowners, did not actually control housing prices but only increased side effects.

He predicted that future policies such as expanding public rental housing for the middle class, land leasehold housing, and the Real Estate Transaction Analysis Institute would also have little impact on market stabilization. He expressed concern that policies without sufficient review and communication, like the two lease laws which started with good intentions but had poor results, would inevitably lead to failure again.

The interview with former Minister Choi, who currently serves as co-representative of the Sound Fiscal Forum and the 100-Year Life Participation Platform, was organized in a Q&A format.

Choi Jong-chan, Former Minister of Construction and Transportation

-Since the launch of the Moon Jae-in government, 24 real estate policies have been introduced, but housing prices have not stabilized. How do you evaluate this?

▲The real estate policy should be considered a complete failure. The approach of ignoring market principles and trying to solve everything through government regulation was wrong. It's like thinking that if prices rise, you can solve it by making a law to punish those who raised prices, which does not work in the market. In short, all mistakes stemmed from 'distrust in the market and overconfidence in the government.'

-Do you think the two lease laws, which had a major impact on the real estate market last year, are also problematic?

▲In a way, it was a very naive idea. While it seems good to protect tenants, the landlords' position must also be considered. If you prevent rent increases and force contract renewals unconditionally, the supply of rental housing decreases, and landlords try to compensate for difficulties in other ways, causing side effects. I don't understand why such considerations were not made. This is not a system being introduced for the first time. It has been tried in Korea before and there are cases in other countries. Everyone knows what problems arise. As a result, only tenants suffered.

-The government is focusing on expanding public rental housing. The government's goal is to make houses not just a place to 'buy' but a place to 'live.'

▲Increasing public rental housing is necessary. Compared to other countries, Korea has less public rental housing. From a social policy perspective, it is necessary to supply rental housing even at a slight loss for low-income groups. However, it is wrong to think that the public sector must solve all rental housing problems. Rental housing for middle and high-income groups should be left to the market, and the public sector should supply rental housing for low-income groups that the market cannot serve well. Korea's homeownership rate is about 58%. There is no country in the world where 100% of people live in their own homes. There is always demand for rental housing. However, the government is implementing policies to eliminate multiple homeowners. If the government’s hope comes true, everyone will become a single-home household and private rental housing will disappear. But it is practically impossible for the government to supply 100% public rental housing.

-The quality of rental housing supplied by the market and by the Korea Land and Housing Corporation (LH) must be different.

▲The private sector operates based on profit motives. Even for the same rental housing, construction companies or buyers are very strict to maximize profit. On the other hand, LH analyzes to some extent but has no incentive to carefully consider the size or location that matches demand. Without incentives, rental housing that meets demand cannot be supplied. For example, a quarter of the rental housing complex in Hwaseong, Gyeonggi Province, visited by the president, is vacant. Killing the private rental market and having the public sector do everything is inefficient.

-There is much analysis that nationwide housing prices rose due to the balloon effect caused by the government's 'pinpoint regulation.'

▲This is another example of government overconfidence. Housing prices cannot be controlled by pinpoint regulations. If there is 100 trillion won of idle funds chasing real estate, 10 to 20 trillion won should be withdrawn to reduce overall pressure, but leaving 100 trillion won and regulating 'this area is not allowed, then how about this area?' is meaningless. It is necessary to create financial products where people can invest soundly to deflate the bubble. If real estate REITs receive many tax benefits and the perception spreads that dividends are good for retirement, apartment demand can decrease.

In 2003, during the Roh Moo-hyun administration, Choi Jong-chan, former Minister of Construction and Transportation (now Ministry of Land, Infrastructure and Transport), is reporting on work to the late President Roh Moo-hyun (right). (Photo by Yonhap News)

-How do you evaluate the establishment of the Real Estate Transaction Analysis Institute, a supervisory organization?

▲It doesn't make sense to create a permanent organization just because real estate prices are rising now. If real estate prices stabilize in 2 to 3 years, the staff here will have nothing to do. Also, creating this organization does not stabilize the market. There are many real estate-related organizations within the Ministry of Land, Infrastructure and Transport. The government should not operate like this. It is a waste of budget.

-Last year, the apartment subscription market was a 'frenzy' itself. The controversy over 'lottery pre-sale' continues.

▲Price regulation on pre-sale has no effect on price stabilization and only serves as a means for those who get the pre-sale to increase their wealth. The logic is simply that since the homeless are socially disadvantaged, they should be sold cheaply so they can make money. Then we need to think about whether it is socially just to select a few among many homeless people and give them huge capital gains. It would be better to give less profit to a very small number of winners and distribute that money to many people. For example, instead of selling a 1.5 billion won house for 800 million won, sell it for 1.2 billion won and use the remaining 400 million won to build more rental housing. Another problem with the current subscription system is that homeless people in Seoul have lottery chances, but those in the provinces do not. This causes population concentration in Seoul and the saying 'Even if you are homeless, you have to go to Seoul' arises.

-The government plans to expand land leasehold housing to prevent unearned income from real estate.

▲They are too ignorant of human nature and reality. People buy houses for two purposes: a place where they can live with peace of mind, and to gain capital gains later or at least not lose their wealth relative to inflation. Land leasehold housing is not much different from long-term rental housing in that it does not allow capital gains. If you live there for 10 years and then try to move, there will be no increase in surrounding house prices. Then people will inevitably blame the government, saying 'I thought the government policy was good, but I alone became poor.' The new Minister of Land, Infrastructure and Transport bought a house with bank loans in the past. Isn't everyone in the same situation?

-What direction should the government take in 2021?

▲The shortage of good-quality new apartments in urban areas should be solved by easing redevelopment and reconstruction regulations. This does not go against the public interest. It is understandable if it is prohibited due to infrastructure or traffic capacity issues, but increasing floor area ratio has already been agreed upon. The logic that apartments are not allowed because they are decent is wrong. Hotels or commercial buildings are simply demolished and rebuilt, and new roads are built even by damaging fields to go faster despite existing roads, but blocking apartments through safety inspections is not right.

New town development should also be approached cautiously. Korea's population is declining due to low birth rates. In Japan, many new towns have already become ghost towns. In 20 to 30 years, Korea will also face ghost town issues. To disperse demand from Gangnam, the construction period of the metropolitan area express train (GTX) planned in Ilsan and other areas should be shortened by at least 1 to 2 years to make living better. It is also necessary to disperse education demand concentrated in Gangnam to the outskirts.

-What is your outlook for the real estate market in 2021 under Minister Byeon Changheum's leadership?

▲From what has been said so far, I don't see much difference from the previous minister. Regardless of who the new minister is, I hope they think well about market principles and do not overtrust the government. If everything could be solved by government regulation and laws, no country in the world would have trouble with economic policy.

This content was produced with the assistance of AI translation services.