[Insight & Opinion]The Three Key Conditions for Housing Policy

Success Requires Considering Housing Characteristics
Integration with Infrastructure... Focus Needed on Transportation
Improving Taxation System and Reducing Money Supply Also Essential

The Lee Jaemyung administration is fully committed to stabilizing housing prices. It aims to increase housing supply through heavier taxation on owners of multiple homes, and to stabilize housing prices by reducing demand through a housing transaction permit system, increases in property and capital gains taxes, and stricter loan regulations. However, for these housing policies to be successful, it is essential to take into account the unique characteristics of housing.

First, as an essential good, housing can only serve its role when integrated with living infrastructure such as transportation, education, and distribution. No matter how much housing supply is increased, if transportation infrastructure is inadequate, housing prices cannot be stabilized. Additionally, while land is a durable asset, housing has the characteristics of a non-durable asset. Housing requires constant management to fulfill its function. The reason why public housing in developed countries has often failed and become slums is also due to these characteristics. In addition to microeconomic factors such as supply and demand, housing is also influenced by macroeconomic variables like interest rates and money supply. As a real asset, when it is expected that the value of money will fall due to an increase in the money supply, housing demand rises. Housing is closely related to taxes as well. While it is a place of residence, it also serves as a real asset and an investment vehicle. If property or capital gains taxes are increased and deduction systems are revised, the effective tax rate rises, post-tax investment returns decline, and housing demand decreases.

The most significant reason for the recent surge in housing prices and the deepening polarization is the unfair tax system. Until now, the government has imposed property and capital gains taxes based on the number of houses owned. Regardless of whether the house is high-priced or the amount of capital gain, if it is a single house, up to 80% of taxes have been uniformly reduced or deducted. As a result, the post-tax investment return on high-priced single homes in Seoul has risen, driving up nationwide demand for housing investment in Seoul and causing prices to soar and spill over to other regions. The government should change the taxation standard from the number of houses to the total value of the homes owned, and implement differentiated reductions and deductions according to housing prices and capital gains. This would ensure fair taxation, reduce post-tax investment returns, and help stabilize housing prices.

It is also important to focus on expanding transportation infrastructure rather than solely increasing housing supply. Another reason for the growing housing demand in Seoul is inadequate transportation infrastructure. Because it is difficult to commute into Seoul for work from the greater metropolitan area, demand for moving into Seoul has increased. As more redevelopment occurs in Seoul and the surrounding metropolitan area, it becomes even harder to enter Seoul from the outskirts, further increasing housing demand in Seoul and risking greater polarization. The solution is to disperse demand for Seoul, which can only be achieved by expanding transportation infrastructure that allows easier access from the metropolitan area into Seoul.

It is also necessary to reduce money supply to stabilize housing prices. Even if the government suppresses demand and increases supply, if the money supply rises due to lower interest rates, prices will still go up. When interest rates fall, the cost of borrowing decreases, leading to increased housing demand. If the value of money falls due to a larger money supply, demand for real assets like real estate rises. The money supply increases not only through low interest rates but also through the government's expansionary fiscal spending. The government must curb excessive fiscal spending to lower the rate of money supply growth and stabilize housing prices.

Excessive increases in housing prices not only intensify polarization but also lead to low birth rates and slow economic growth. There is also a risk of financial instability if a bubble bursts, making housing policy all the more important. If housing prices become excessively high, housing increasingly serves as an investment vehicle rather than a place to live. Policymakers need to take these characteristics into account and improve deduction and reduction systems to lower the post-tax investment returns of high-priced homes. Housing policy can succeed only when transportation infrastructure for access to Seoul from the metropolitan area is expanded and fiscal policy is managed efficiently to slow the growth of money supply.

Kim Jeongsik, Professor Emeritus of Economics at Yonsei University

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