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Contents | Executive Summary | How to obtain this publication | Additional information
The following OECD assessment and recommendations summarise Chapter 3 of the Economic survey of Korea published on 20 June 2007.
Contents
The government plans to increase housing in the capital region
The government has, in fact, introduced five real estate policy packages since August 2005, reflecting concern about a possible house price “bubble”. While the increase in the average nation-wide house price in Korea since 2000 is well below the average of other OECD countries and remained moderate in 2005 06, house prices have become a very sensitive political issue because of a more rapid pace of increase in the price of apartments in the capital region, particularly in the Kangnam area. A main reason is the decline in the private supply of housing caused by difficulties in securing construction sites, in part due to persistent regulations, while demand for housing has increased in certain areas of the capital region due to favourable living conditions, including the availability of high quality education. The government fears that the large price rises in the capital region could spill-over to other parts of the country and it is also concerned about the large capital gains for some people and a widening dispersion of wealth. It is for these reasons that the government has responded to wide-spread public concern regarding house price rises by acting on a variety of fronts. It has boosted the planned increase in housing construction in the capital region from 1.48 million units over the period 2007 10 to 1.64 million units, with the public sector taking the lead. In addition, it plans to expand the number of public rental housing units over the next decade from 0.8 million to 3.4 million units, 20% of the total housing stock. This is to be partly financed by a new real estate fund that will rely on public financial institutions, such as the National Pension Fund, with investors promised a yield above that on Treasury bonds. Increasing the supply of housing that matches household preferences is the key to reducing price pressures.
Figure 1. House price increases in Korea have been relatively modest compared to other OECD countries
Percentage change in real terms between 2000 and the
latest quarter available(1)
1. Nominal house price deflated by the overall consumer price index. Data for Korea includes the fourth quarter of 2006.
Source: Girouard, N., M. Kennedy, P. van den Noord and C. Andre (2006), ''Recent house price developments: the role of fundamentals'', Economics Department Working Papers No. 475, OECD, Paris.
Other government measures to stabilise the real estate market…
In addition to the plan to increase the supply of housing in the capital region, the government has introduced a number of other real estate policies, including steps aimed at reducing “speculative” demand and lowering house prices:
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The Financial Supervisory Service cut the ceiling on the loan-to-value (LTV) ratio – the amount of the loan relative to the value of the house – from 60% to 40% in most of the capital region.
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The Comprehensive Property Tax, a nation-wide tax introduced in 2005 on top of local property taxes, imposes progressive rates of up to 4% on real estate holdings.
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The capital gains tax has been raised to at least 50% for those owning two or more homes, compared to rates of 9% to 36% for owners of one home.
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The price of new houses provided by the public sector in new towns in the capital region is to be reduced by 25%, in part through reform of land-use regulations.
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Private construction companies are required to publicly disclose their construction costs in the capital region. Local governments throughout the country will set price caps on house prices, taking into account the cost of land and construction and allowing an “appropriate” profit. This step is expected to lower house prices by 20%.
… may reduce housing supply in the longer term
The government measures have to be seen in the context of its objective to limit the large house price swings in the short term. Despite the merits of such a policy objective, some of these policies have the potential to create substantial harm if allowed to persist in the longer term. First, some actions that are aimed at limiting demand for housing may have adverse dynamic affects on supply. Second, international experience shows that high taxes on capital gains can result in lock-in effects that also reduce housing supply. Third, requiring companies to disclose their construction costs and setting price ceilings will weaken incentives to increase efficiency and again reduce supply. In sum, there is a risk that the various measures to reduce so-called speculative demand and control house prices will decrease the supply of housing from the private sector and strengthen price pressures in the longer term, despite the planned increase in publicly-provided housing. Given these considerations, the government should take a longer-term view and address other factors driving demand to live in the capital region, for example by improving the quality of education in other regions of the country. In addition it should unwind many of the regulations on land use and housing development, thus inducing more private supply, which would better meet consumer preferences. At the same time as regulatory change is undertaken and housing supply becomes more elastic, most of the recent interventions, such as housing price controls, need to be phased-out, which would further increase housing supply. Finally, the government should ensure that there is enough competition in the market.
Figure 2. Concentration in the Korea’s capital region is increasing
Source: Korea National Statistical Office and Thomas Brinkhoff (2006), City Population, www.citypopulation.de.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. The Policy Brief (pdf format) in Korean is also available. It contains the OECD assessment and recommendations but not all of the charts included on the above pages.
The complete edition of the Economic survey of Korea 2007 is available from:
- SourceOECD for subscribing institutions and many libraries
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OLISnet, under "Publication Locator", for government officials with accounts ( subscribe)
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Additional information
For further information please contact the Korea Desk at the OECD Economics Department at eco.survey@oecd.org. The OECD Secretariat's report was prepared by Randall Jones, Taesik Yoon and Tadashi Yokoyama under the supervision of Willi Leibfritz and Stefano Scarpetta.
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Economic Policy Reforms: Going for Growth 2008
