Last week, the government announced additional measures to calm the overheated real estate market. The stronger new measures follow the government’s June 19th announcement of plans to stabilize the housing market. We will take a closer look at the measures released on August 2nd and what sort of effect they will have on the real estate market with professor Shim Kyo-eon (심교언) of Konkuk University’s Department of Real Estate Studies. First, let’s go over the new plans in more detail.

The most important part about the latest measures is the government’s determination to control skyrocketing housing prices in the Seoul Metropolitan area, especially Gangnam. As such, the government will be strengthening transfer taxes to regulate speculators, or home owners who have more than one home. Another important aspect about the latest measures is that it has designated “speculation restriction zones”. The areas will have stronger regulations in transactions and mortgages. These two measures are what the market is paying keen attention to right now. Other than these measures, there are also policies to protect real buyers who are looking to buy a home for themselves, and to strengthen joint investigations to cut down on speculation.

The government’s latest real estate measures are tougher and more comprehensive than those in the recent past. In fact, the government reinstated “speculation restriction zones” for the first time in six years. A total of 11 districts in Seoul, including the intensely overheated four districts in Gangnam and Sejong City, have been designated as restriction zones and will face tougher regulations. Once an area becomes a “speculation restriction zone,” it becomes difficult to borrow money to buy real estate in that area because the Loan to Value ratio and Debt to Income ratio are greatly reduced. Also, if you buy property in the restriction zone, you will not be allowed to sell the ownership rights for up to five years, nor will you be able to transfer your member status in a reconstruction project. Each household will only be able to get one mortgage in the restriction zones as well. These are powerful measures that cover loans, transactions, and tax restrictions, making them very different from the earlier plans announced by the Moon administration on June 19th.

The measures released on June 19th were considered to be weak as they seemed to keep in mind the possibility of a rate hike in the second half of the year and the increased supply of new apartments. In fact, housing prices rose further after the measures were released. The government must have felt the need to kill off the momentum fast, which is why it quickly released a new set of plans. When Gangnam’s housing prices start to rise, it wreaks havoc on housing prices in the nation as a whole. This is why the government came out with tough measures in an effort to prevent economic difficulties for ordinary citizens. What is different from previous administrations is that these measures were released when housing prices were rising nationwide. However, housing prices outside of Seoul have been falling. With that in mind, the government releasing stronger measures indicates it wanted to calm the overheated market quickly.

Towards the start of the Moon Jae-in administration, the government released a set of real estate measures but they did nothing to calm the overheated market. In fact, Seoul apartment prices increased by 0.37 percent in the last week of July, the highest figure since 2008. As such, the government declared war on real estate speculation. So, how will these measures influence the market?

For a few months, there will be a steep fall in the number of real estate transactions. This is likely to continue for some time. Also, because the latest measures target those with multiple homes through increased transfer tax and investors having to pay the government a portion of their profits from reconstruction projects, prices for Gangnam apartments preparing for reconstruction will face downward pressure in the short term. A heavy transfer tax is a big threat to speculators which could prevent them from buying and selling too many homes. In turn, this could help cool down the overheated market to some degree.

The government’s latest measures are showing instant results. Many of them went into effect on August 3rd and real estate offices said they were continuously getting calls from people who wanted to sell and there was a big drop in the number of investors. When strengthened mortgage restrictions and transfer tax come into effect, housing prices are expected to decline. However, some point out that there is a limit to policies that are only focused on suppressing demand.

Taking a look at the latest measures, there are a few regulations related to reconstruction projects. Making reconstruction projects more difficult could decrease supply, as the only way to provide additional housing in Seoul is through these projects. When there is a decrease in supply, it will surely lead to an increase in housing prices. As there is a significant shortage of available housing units in Seoul, suppressing the supply could lead to inflationary pressures.

The government proclaimed that it will put real buyers and the stabilization of housing for ordinary citizens as the top priority. However, the latest real estate plans may cause stagnation in the construction sector, resulting in a reduced supply of housing in the long term. If the real estate market makes a hard landing, it could have a significant impact on the economy due to a depression in domestic demand coming from weakened construction investment, an increase of the so-called “house poor”, and an explosion in household debt. This is why there are calls for the government’s real estate policies to look at the long-term effects.

The biggest problem for the Korean economy is household debt. The economy always remains in an unstable state because bold measures to decrease household debt could lead to an economic collapse but not doing anything about it could lead to bigger problems down the road. That is why we need to look at how to resolve this issue in the mid- to long-term and real estate policy plays a big role. Short-term real estate policies usually don’t work. That is why advanced countries focus on stable supply for the mid- to long-term. They don’t come up with measures because real estate prices shot up one month. It is important to create a stable housing supply regardless of the economic situation. Although the government says these measures are for ordinary citizens, it could end up making things more difficult for them in the long term. That is why I believe supplementing these measures with policies to help alleviate the housing problem for the poor will help the government achieve its goal.

The real estate market is a big challenge to the Korean economy as it influences a variety of different areas such as household debt, growth rate, domestic demand, and marriage and birth rates. That is why developing and implementing policies for this sector requires a lot of research into how the real estate market affects the country’s economy, and for the creation of supplementary policies focused on home buyers.