Price Caps on New Houses have Adverse Effect on Housing Prices

The OECD urged the Korean government to ease real estate related regulations, including price caps on new houses. It also advised the government to proceed cautiously in raising spending since a substantial increase in spending on social welfare could negatively affect economic growth.

In the “Economic survey of Korea 2007,” released on June 20, the Organization raised questions over the incumbent administration’s policies including those on real estate and welfare.

It is noticeable that the report’s key points are in line with the criticism of domestic economists and the mainstream media against the government’s economic policies.

Raise a question over the participatory administration’s housing policies -

The report voiced concerns over real estate policies under the separate heading of “Real Estate and Regional Development Plans,” following macroeconomic assessment.

It warned, “If measures like the housing-price ceiling remain for a longer period of time, they will have the potential to create substantial harm as they tend to reduce the supply of housing.”

Regarding the stabilization of housing prices, it advised that the government should encourage the private sector to supply houses by reducing regulations on land use and housing development, and that as housing supply becomes more elastic, recent interventions, such as housing price controls, need to be phased-out.

As for the rising house-prices in Gangnam area, the report said, “The reason for the decline of private housing supply lies in difficulties in securing land, partly due to persistent regulations. However, favorable living conditions in the area raised demand for housing and contributed to the shortage of supply.” The assessment implies ‘speculation’ is not the main culprit of the increase in the price of apartments.

It also laid blame on the Bank of Korea which raised reserve requirement last year to stabilize housing prices, saying, “Monetary policy is not an efficient instrument for influencing real estate prices. Too much focus on housing problems risks distracting the monetary authorities from their primary objective of stabilizing the prices of goods and services.”

That means monetary policy has a limited effect as the rapid increase in housing prices is confined to specific areas of the capital region.

Kim kyeong-hwan, an economics professor at Sogang University, explained, “The OECD report pointed out that real estate policies failing to take market principles into consideration will eventually result in an adverse impact on the economy.”

Need to show prudence on spending increase -

The OECD also cast a doubtful eye on the incumbent administration’s plan to expand spending on welfare.

The Report pointed out, “Given the rapid pace of population aging in Korea, public social spending will jump to 21 percent of GDP by 2030 from the current six percent. If the experiences of developed countries are any guide, Korea needs to proceed cautiously in raising spending.”

Effectively expressing concerns over an annual 20 percent increase in welfare spending, it warned that a substantial increase in welfare expenditure leads to a greater tax burden and negatively influences the economy,.

The report also made clear that excessive government spending threatens the soundness of the government’s financial position, saying that government expenditure has outstripped the annual increase in revenue since 2002, and the budget deficit has widened, excluding the social security surplus, and that spending restraints combined with tax reform would help to achieve a balanced budget in the mid-term.

The current labor practices need to be fixed -

The OECD also criticized measures that protect non-regular workers and allow them to become permanent workers.

It emphasized, “The difficulty of dismissing regular workers made employers favor non-regular workers. The new labor law, aiming at ending discrimination against non-regular workers, should not be allowed to reduce overall employment.”

As for low fertility rates and an aging population, it advised that the government should provide high quality childcare facilities, give vouchers to parents, and foster competition among providers.

In order to attract foreign investment, regulations on products and services markets should be reduced and regulatory reform should be extended beyond the FEZs to the rest of the country. In addition, for-profit hospitals and private health insurance should be allowed in order to foster the local medical industry.