The government has been rolling out a flood of measures to fix South Korea's property problems, holding policy forums with real estate ministries such as the Ministry of Land, Infrastructure and Transport, the Financial Services Commission and the finance ministry, and hosting a grand debate presided over by President Lee Jae-myung. Yet, contrary to the good intentions, public sentiment is cold and the market is responding differently. Why does this happen? In economics, this is called "unintended consequences" — well-meaning property policies can change the way consumers behave, producing results that diverge from the policy's aim or even run opposite to it.
In 19th-century India, colonial Britain offered a bounty for catching dangerous cobras. Once the bounty was paid, people began breeding cobras at home, and when the government caught on and scrapped the reward, they simply released the snakes into the wild. China's "rat-tail policy" rewarded people for turning in rat tails, but some cut off only the tails and let the rats breed again to keep collecting the reward. Regulations that produce bad results at odds with their design are easy to find.
Property policy is no different. When the government regulates real estate, consumers do not move passively in line with the law's intent; they make choices that best suit their own circumstances or reduce their own risk. Good intentions matter, but property policy must also weigh the side effects that come from the paradox of regulation. Recent property policy has been criticized as having degenerated from policy into politicization — packaged as good policy while ignoring the side effects of the paradox of regulation, and thereby producing unintended bad outcomes.
A prime example is the set of three tenant protection laws. In the short term, this policy is good for tenants. But strengthening tenants' rights in the rental market weakens landlords' rights. Over the long term, side effects have emerged: rents that spike sharply every four years, a shrinking supply of rental housing as fewer landlords enter the market, poor upgrades to rental housing quality because of reduced rental income, and further supply cuts driven by falling demand for rental homes.
In the end, the number of rental homes available to tenants is itself shrinking. Existing tenants have been protected, but new tenants are finding it even harder to secure a jeonse lease. The current rise in jeonse prices and the instability in the rental market cannot be attributed solely to the three tenant protection laws. The problem, however, is that the potential for side effects in parts of the rental market could readily have been foreseen and was not taken into account.
The same goes for the owner-occupancy requirement. It is a good policy in principle: those who buy a home should buy it to live in and must actually reside there. Under it, homeowners' comprehensive real estate tax and capital gains tax benefits are differentiated according to whether they live in the home. But complaints are pouring in over the "non-occupancy exemption criteria" that serve as the precondition for the tax benefits granted to single-home owners. Quantitative standards for the exemptions can be set, but qualitative ones cannot. A psychological factor such as an incident involving a next-door neighbor, for example, is not easily addressed by a fixed standard.
The "one home per household" policy, too, has long been seen as a policy for realizing social justice. But its side effects are considerable. As demand piled into a single prime property, it bred the side effect of soaring home prices in Seoul's three Gangnam districts. And households with financial room to spare have used the separation of household members to own multiple homes, deepening wealth polarization and driving the splitting of households. In fact, even countries that have already put a one-home-per-household policy into practice have seen various side effects, including restrictions on household formation, problems with housing quality, shortages of rental housing and difficulties in relocating.
In conclusion, for property policy to succeed, it must be preceded not only by the pursuit of the justice of housing stability but also by a reasonable judgment of how the policy will change people's behavior and how the property market will respond. What matters is the policy's outcome. The property measures being poured out in the name of stabilizing the housing market need to be approached carefully, with an eye to whether they carry side effects over the long term.
