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Government Ignorance of the Housing Market

Posted February. 08, 2007 07:09,   


In 2006, the government announced that it would purchase 300 houses through the Korea National Housing Corporation (KNHC) and supply them to middle class users of rental houses as a pilot project, and that it would purchase 1,000 additional houses each year from 2007 to 2012.

But the number of houses for sale registered to the KNHC since the KNHC made its announcement of the purchase on September 13 last year was cut short at 19 (1 in Seoul, 11 in Gyeonggi, 7 in Incheon). The government has not even been able to purchase those houses due to the rapid hike in the prices of houses in the capital region since last October.

“Who would sell the apartments in the middle of the city, in large complexes of above 500 units, not any older than 10 years, which are the qualifications [set by the government], at prices 10-20 percent lower than the market price?” the KNHC asked. “It seems the government has set its sights too high.”

According to the plan, the KNHC will purchase 1,000 more houses from this year, but it did not even allocated budgets this year for the project. No wonder some point out that the project is being abandoned.

The calculation of budget for the purchase of rental houses also contradicts common sense. The government allotted about 347 million won per apartment (2.19 trillion won in total) and did not take into account the inflation rate, let alone the increase rate in housing prices.

On this subject, the government explained, “The prices of houses rise and fall.” But the government is changing its logic depending on its need. For example, in this year’s January 31 real estate measure announcement, it set the sales price of rental apartments 10 years later on the premise that prices will rise by three percent on annual average.

The impetuously drafted “Jan. 31 measures” cast doubts on its viability. The government said that it will build 30-pyeong rental apartments by raising a public real estate fund, and the construction cost per unit would be 180 million won, lease bonds 25 million won, and monthly rent 521,000 won. But many criticize that this design is unrealistic.

In the first place, the construction cost, six million won per pyeong, is only half of the price of apartments in Pangyo New City that KNHC put on sale (120 million won per pyeong). The lease deposit is only 14 percent of a rental apartment in Pangyo (140 million won), and the monthly rent is lower by about 60,000 won.

The government is required to guarantee six percent profits for the public apartment fund, so this situation could lead to inordinate deficits in the government budget. Still, the government publicly promised profits.

But a high-ranking government official confessed, “Actually, the prices noted as examples in the ‘Jan. 31 Measures’ are based on a situation where the prices are extremely low, and it is uncertain whether the houses could be provided at those prices in reality. Detailed measures have not been drafted yet.”

jefflee@donga.com koh@donga.com