firmly in place has been confirmed through an abundance of historical evidence.
Housing Market Principle
One of the most controversial issues today is real estate. Prices of apartments in Gangnam and the Metropolitan Area are soaring and prices of certain lands are also skyrocketing in the wake of diverse development projects led by the government, even more heating the controversy over bubbles in the real estate.
It would be safe to say that most Koreans have ever experienced profits and losses caused by changes of real estate prices, thus real estate has been one of the greatest concerns to Koreans. Although the President proclaimed several times the government's commitment to settle real estate prices, its fruit seems to have yet to be born yet. It may be needless to mention the housing market principle when most Koreans are incredibly acquainted with real estate, but it is worth looking into characteristics of housings as goods and the housing market principle in order to approach this issue in a basic way.
What characteristics do housings and the housing market have?
Most of all, housings are essential goods. Housings provide both living place and rest, basic services necessary to a life. In the respect, people tend to show such responses as sleeping outdoors, committing crimes or suicides unless the basic needs are met. Some often cite this characteristic as a ground for public housings. Thus, it is the public sector that should supply housings to people who cannot have their needs met on their own in the market.
Secondly, housings are normal goods. The more they make money, the more they want to live in better houses. This adds more meanings to housings, such as high-class cultural life and rest, accumulation of wealth, and means to show their wealth, beyond a basic living place. Accordingly, housings and living environments should be improved so as to comply with such changes in housing demands as the economy develops, and otherwise, new development areas will become rarer, bringing bigger disparity in regional development.
Third, housings are goods with huge externality. Although housings retain several attributes as public goods since they can be shared by several people at the same time, it does not mean that members of a family sharing a housing can be a free rider. In the respect, the public sector needs not intervene in the market to supply housings unless it is to supply housings to low-income people as essential goods for their stable life. Excessive intervention of the public sector is likely to distort the market and lower efficiency in the housing supply.
Yet housings are goods with high externality from diverse aspects. They show several types of externalities, from noise in the neighborhood, the most usual type of externality, to effects of the neighborhood, house size and ownership on personal reputation or social life, and to poor housings or living environments giving insecurity to near areas. In particular, they often show the so-called pecuniary externalities where high prices in certain areas bring up prices of apartments in adjacent areas as well. This externality of housings sometimes serves a ground for which the government directly intervenes in such areas as redevelopment or housing supply for low-income people.
Fourth, housings are special goods coming with diverse grades and markets in accordance with the area, size and construction year. There is, of course, close substitution among them. For instance, if getting an opportunity to buy good apartments, they are likely to move into better housings, leading to chain migration, and more housings are put on the lower market. Given this, the housing supply policy too concentrated on low-income class may not allow more housings in the lower market by limiting chain migration effect of housings.
Likewise, the higher housing market also cannot be established without support of the lower housing market. As you cannot move into a better house until you sell your old house, the ground for the higher housing market will get weaker if sales or lease market of lower housings remains inactive. From this perspective, top housing-oriented supply, which can lack support from the lower housing market, tends to be a house of cards.
Fifth, housings are goods requiring land as essential condition. New lands are necessary in order to supply new housings, and government's mid&long-term plans for building land supply should be designed in a way that stabilizes housing prices when the government holds the right to supply building lands. Its mid&long-term housing supply plans should be preceded by thorough research into changes of population, households, household size, marriage age, and preference for housing types.
Sixth, since it takes from several months to several years to build a new house, new housing supply is inelastic from a short-term perspective. While prices of agricultural products can be stabilized through import in case of short supply, housing prices cannot be settled in that way, since housings are goods with higher susceptibility to price changes.
These changeable prices (in fact, rising prices) have made the housing sector highly susceptive to speculation. The demand for housings has characteristics as both real demand for goods and speculative demand for assets, which cannot be easily distinguished. Therefore, market's structure and attributes should be reflected in government's real estate policy designed to prevent speculative income. Government's reckless regulations not considering them, in the long run, may impose burden on the lowest-income class who do not own their house, unlike its initial intention. In fact, the rent paid by tenants at the bottom of the layered market structure serves the basic ground for the housing market.
One of the best policies in the market economy system is to allow the market to properly operate. It is noteworthy that even a policy aimed at redistributing income, in no connection with efficiency in resource distribution, can give rise to resistance and collusion of the market if it turns a blind eye to the market and runs against market functions, and the subsequent losses will be ultimately inflicted on the weak. This is why characteristics of housings and the housing market should be reviewed before setting up a basic direction of the real estate policy.
Oh Young-soo (Prof. of economics, Kyungbook Univ., ysoh@mail.knu.ac.kr)
