The booming districts of Bundang in Seongnam City and Suseong in Daegu City have been added to the list of “overheating speculation zones.” The two districts have now joined other regions such as Seoul, Gwacheon and Sejong that were included in the same list a month ago. Under the follow-up measures, the government will also ease qualifications for the price cap rule for new apartments. That means the government will directly manage the prices of new apartments in private housing sites. Qualifications for the price ceiling system in those sites are too strict, making the system ineffective since April 2015. But the government will draw up a plan to apply the system in a more flexible way.

The September 5 follow-up measures have two key points, that is, the additional designation of speculative zones and easing qualifications for the price-cap system for new apartments. Following the August 2 real estate regulations, the overheated real estate market has shown signs of stabilizing. But the two districts in question, Bundang and Suseong, have still seen apartment prices increase, with their weekly housing prices rising an average of 0.3 percent. Obviously, the two regions have experienced the so-called “balloon effect,” where investors flocked to areas that are not subject to real estate regulations. Bundang and Suseong came in first and second, respectively, in the rate of housing price growth last month. Therefore, the government added the two districts to the list of overly speculative regions. Also, the price cap system for new houses will be applied to private apartments from as early as mid-October. The system is designed to prohibit new apartments from being set at higher prices than those in surrounding areas so the prices of new houses will not prompt those of existing apartments to rise. If the system is applied, the prices of new apartments will be fixed within the sum of the housing land price and construction costs. Due to strict qualifications for the system, however, it has not been applied to any apartment for the last two and a half years. The government’s decision to revive the system is seen as a warning to the real estate market.

The government seems to be determined to completely block the balloon effect. In fact, a large amount of money is flowing into the real estate market due to the low interest rates and many retirees who want to invest in properties for their retirement nest egg. That’s why the lingering money in the market tends to be funneled into the areas that are less subject to regulations. In another warning sign to this phenomenon, the government has also placed some districts in Incheon and cities in Gyeonggi Province as well as the entire Busan area on its intensive monitoring list, saying that it will designate those regions as speculative zones if housing prices there become unstable. The government is expected to continue to adopt real estate measures centering on demand control.

The fresh set of regulations, which came only a month after the August 2 measures, is interpreted as the government’s resolve to stabilize housing prices and root out speculative forces. The intensive monitoring list shows that the government will not sit idle and watch the balloon effect, where floating money in the market flows into areas with less strict regulations. President Moon Jae-in has also said that he has tougher measures in his pocket, so the overheated housing market is likely to cool down in the future.

Amid the strong regulations, the designated regions will likely level off for some time. They are under nearly 20 regulations. For instance, those who seek mortgages for houses in those areas will be subject to 40 percent loan-to-value and debt-to-income ratios. This means it will be more difficult to buy homes with loans. Also, reselling of the purchase rights of new apartments will be restricted. In addition, transactions involving homes worth over 300 million won, which is about 270-thousand US dollars, will be subject to the housing transaction report system. The transactions must be reported to government authorities, with the financing and moving plans additionally submitted. This rule is expected to curb speculative investment to some extent. Now, multiple-home owners are at a crossroads, wondering if they have to sell part of their properties or keep them. Or they could officially register as landlords or give the properties to their children. The government will soon announce more policies, like a roadmap for “housing welfare” and a household debt management plan. Then, multiple-home owners may find it easier to make decisions.

Housing prices have been on a steep rise due to low interest rates and lax regulations. Right before the announcement of the August 2 measures, apartment prices in Seoul increased an average of 0.33 percent, the fastest weekly growth rate this year. An apartment unit scheduled for reconstruction even saw a price rise of 150 million won or about 136 thousand US dollars in just a month. Meanwhile, some investors made so-called “gap investments.” It refers to the practice of buyers purchasing apartments currently under jeonse contracts by directly making contact with landlords and taking ownership of homes which tenants are still living in. Jeonse is a type of lease where a tenant puts down a large deposit, usually for two years, and the owner returns the deposit when the contract expires. The gap investment is believed to have contributed to soaring housing prices. But the government’s series of real estate regulations have changed the atmosphere in the market. Speculative demand has decreased, with overall housing prices in the nation showing little change. Apart from the positive effect, however, some are concerned that the price cap system may lead to a decline in the supply of new apartments.

Under the price ceiling rule, prices of new apartments cannot be set at high levels. Discouraged by a number of regulations, apartment complexes that initially planned reconstruction may decide not to execute their plans or even stop current construction works. If reconstruction projects face uncertainty and contraction, the housing supply will inevitably decrease. It is important to stabilize the market, of course, but it is also necessary to boost supply because supply may determine prices over the long term.

The price cap system for new apartments has its pros and cons. The falling prices of new apartments will help stabilize the housing market. On the flip side, though, construction companies and apartment complexes may slow or stop their reconstruction plan for fear of low profits. A subsequent shortage of houses may raise housing prices again. If the prices of new apartments fall below the market price, investors may scramble to buy those apartments in anticipation of future profits. To manage these side effects, the stable supply of apartments is necessary for those actually in need of houses, while still checking speculative demand.

When it comes to a real estate policy, both supply and demand should be taken into consideration. The recent measures are mostly about controlling demand. Demand control could be highly effective in the short term. There is a saying that no market can win the government in the short term, while no government can win the market in the long term. That’s why the government should also come up with ways to increase supply. It says that it will build 50-thousand homes for newlywed couples. I think the government needs to expand the number. For low-income families, the government says that 170-thousand public rental houses will be provided every year. That’s a very positive plan. But the government may also build more houses for those who hope to own their own homes. If the government provides both public rental houses and new apartments in tandem, the housing market will be stabilized more effectively.

The Moon Jae-in government is dealing with the real estate market issue more actively and preemptively than any previous administration. It plans to announce a household debt management plan and a roadmap for housing welfare this month. The government’s housing policy should hopefully prove effective to calm the overheated market, while minimizing the side effects.