[칼럼] Korea Story 23 - Economy and Finance 6  by Atty Jeong-kee Kim

(Newskorea=Seoul) Digital News Team = Korea Story 23 - <Economy and Finance 6  by Atty Jeong-kee Kim>

● Korea has no future unless justice in real estate is established.

Korea has become a real estate republic. Major cities nationwide, especially the capital Seoul, have become typical apartment cities. From an airplane, the rows of apartment buildings look like endless matchboxes. Although the uniform and stifling scenery is astonishing, this is where Koreans live. In this environment, homeowners hoard property to gain windfall profits, while those without homes stretch themselves to the limit to achieve their dream of homeownership.

What does home mean to Koreans? Due to the short history of capitalism, the state has never served as a robust safety net for its citizens. Particularly, efforts to provide 'homes'—essential for living as a social animal—have been lacking. The housing market, which is subject to the basic principles of supply and demand, has often been ignored. Especially in Seoul, where supply has lagged behind demand, the real estate market has always been overheated. As a result, Seoul has become divided between those who have accumulated wealth through real estate and those who have lost hope of owning a home, deepening the wealth gap. Injustice triggered by real estate now dominates Seoul’s skies. No government has ever provided a satisfactory solution to the real estate problem, and during the progressive left-leaning regimes of Roh Moo-hyun and Moon Jae-in, the real estate prices in Seoul surged steeply, and crushed the dreams of homeownership. Is it really becoming impossible for Seoul’s residents to achieve their dream of homeownership? Why can’t Korea do what Germany and Singapore have accomplished?

● Let Supply and Demand Govern the Real Estate Market.

The real estate solution that satisfies everyone is simple. In other words, supply is provided in accordance with the demand in Seoul's real estate market. But why is this basic market principle not working properly? What should we do? Public-private partnerships can maximize supply in line with market demand. In other words, the private sector will carry out redevelopment and reconstruction, and the government will only supply public housing on a large scale to relieve the bubble in the market.

Let’s look at it in detail.

First, it is a social mix-type apartment built through redevelopment and reconstruction led by the private sector. In other words, by activating redevelopment and reconstruction, sales and rentals are mixed. Various regulations such as floor area ratio and floor height will be relaxed, and instead, the rental apartment supply ratio will be set to at least 30% for vulnerable groups without housing. If this happens, the second new town project will gain momentum, and at the same time, it will be possible to care for low-income people in blind spots, so it is in line with the spirit of the Seoul community. In any case, it is important to promote redevelopment and reconstruction projects for Seoul's increasingly aging houses to improve the residential environment and increase housing supply to stabilize the market. In addition, considering the reality of a shortage of residential land in Seoul, the floor area ratio of land that can supply housing not only in residential areas but also in semi-residential areas and commercial areas must be built up to the upper floor area ratio set by the National Land Planning and Utilization Act. This will increase housing supply.

Second, it is a public mortgage loan apartment built under the leadership of the government. In other words, it is a type of land lease apartment that is public private housing. Singapore is a success story. All apartments supplied by the government, i.e. SH Corporation including LH Corporation, are public mortgage loan apartments. So to speak, land ownership is held by SH Corporation or LH Corporation, and the surface rights are sold to consumers. The reason Koreans are obsessed with their homes is because they think it is a safety device to protect themselves and their families. Taking this national sentiment into consideration, the idea is to give ownership, even if it is just superficies, rather than lease, to consumers who engage in economic activities. There are five levels: 20 pyeong, 25 pyeong, 30 pyeong, 35 pyeong, and 40 pyeong. If the construction cost per pyeong is 8 million won, 20 pyeong is 160 million won, 25 pyeong is 200 million won, 30 pyeong is 240 million won, 35 pyeong is 280 million won, and 40 pyeong is 320 million won. Add to this the fee for using land held by the government. Even if you don't have a lump sum, you can achieve your dream of owning a home by purchasing it. However, to prevent it from becoming a lottery, long-term mortgage loans guaranteed by the Seoul Credit Guarantee Fund or National Credit Guarantee Fund will be introduced and a sufficient amount will be supplied simultaneously. How is this possible? You can go with the American mortgage loan method. In other words, only 10% of the sale price is paid, and the remaining 90% is repaid in principal and interest over 20 to 30 years. The principal and interest will vary depending on the balance and number of years, but will be around 1 million won per month. However, after 20-30 years, it will be completely owned by you and can be sold freely. However, if you sell before the period is completed, it will be sold to SH Corporation or LH Corporation. Because it is a selling method, speculation can be blocked at the source, and the house functions solely as a space for living. 

Additionally, there should be consideration for future generations of South Korea.

First, it is a youth rental apartment. These should be conveniently located for young people, ideally near subway stations. To achieve this, large-scale rental apartments for youth should be built using shared land near subway stations in Seoul. Apartments of 10 to 15 pyeong would suffice, with monthly rent kept to a minimum. By using shared land, there are no land acquisition costs, only construction costs. For example, if the construction cost per pyeong is 8 million won, then 10 pyeong would cost 80 million won, and 15 pyeong would cost 120 million won. With annual interest of 3%, depreciation, and land use fees, the estimated monthly rent would be about 400,000 won for 10 pyeong and 600,000 won for 15 pyeong, which is manageable for working youths. Initially, a large supply should be provided, and then rental apartments should be supplied incrementally based on demand.
In addition, consideration must be given to Korea's future generations.

Second, it is a newlywed apartment. In an era of low birth rate and aging population, it is the government's responsibility to stabilize housing for newlyweds. Entering an era of population cliff without a productive population darkens the future of the Republic of Korea. We need a customized small city where newlyweds can easily raise their young children. What should we do? We would like to give 800,000 pyeong of Yongsan Park as a gift to newlyweds who are the future of Korea. So to speak, the plan is to build 100,000 25-pyeong high-rise apartments for newlyweds using public mortgage loans. Of course, this is assuming it is a park city. In addition, the goal is to create a Silicon Valley in downtown Seoul by attracting R&D centers of global companies related to the 4th industrial revolution, such as artificial intelligence, robots, self-driving cars, and biotechnology, as well as 4th industry-related research centers from leading domestic universities. The name is Yongsan U-CITY, which is derived from the pronunciation of YOUTH, which means youth, and ubiquitous, which symbolizes information and communication technology. Of course, it will not be easy to change the Yongsan Park plan. The plan is to build Yongsan Park like New York's Central Park or London's Hyde Park, but I don't know why a large-scale park is needed in the center of Seoul. New York and London are cities built on flat land, so there are no mountains and the rivers are narrow, making it difficult to create parks around them, so parks were created in the city centers. Compared to this, Seoul is a blessed city. Namsan, Bukhansan, Dobongsan, Suraksan, Daemosan, and Cheonggyesan are parks, and the Han Riverside is a park. If you want, you can easily access Children's Grand Park, Seoul Grand Park, and Everland. A revolutionary shift in thinking is required. 

● Break the Real Estate Construction Cartel!!

Do you know that the real estate construction cartel, consisting of government officials, politicians, chaebols, financial institutions, and speculators, has long distorted the market as its ruler? Isn’t it true that the real estate frenzy occurred because ordinary people sought houses not to live in but to sell? Expanding wealth through real estate is harmful. This structure causes one group to gain wealth at the expense of another, which is not justifiable from a social justice perspective. It’s a zero-sum game. Previous administrations also deserve criticism. They have activated the real estate market through construction as an economic stimulus, obsessed with economic growth rates. Liquidity flowing into the real estate market does not contribute to national economic development. Instead, money should flow into productive economic activities, such as the stock market, where it serves as a funding source for companies. Companies use this money for investment, leading to job creation and, ultimately, the export of finished products to create national wealth. Therefore, it is essential to strictly monitor the moral hazard of participants in the real estate sector to fundamentally block unearned income. Officials and politicians should be prevented from turning a blind eye and benefiting, and large construction companies and speculators should be prevented from monopolizing development profits. How should this be achieved?

First, the real estate blind trust system should be introduced. The targets are mid-level officials (manager level and above) in the Ministry of Strategy and Finance and the Ministry of Land, Infrastructure, and Transport, senior administrative officials (senior secretary level and above) in the Blue House’s Policy Office and Economic Affairs Office, and members of the National Assembly’s Finance and Economy Committee and Land, Infrastructure, and Transport Committee, as well as chief experts. This will enhance transparency regarding real estate policy makers and increase trust in policies from the market.

Second, the implementation of post-sale systems, disclosure of sale prices, and sale price ceilings should be mandatory. The targets are large construction companies that create illegal slush funds and conduct strong lobbying with political circles. The post-sale system means allowing buyers to purchase completed apartments. Korea's pre-sale system is an anti-market supply system unique in the world. Although pre-sale systems exist in other countries, they differ from ours. In the US, suppliers procure 80% of the project financing (PF) loans based on project feasibility, excluding 10% of their own capital and 10% of the down payment. In Korea, only about 5% of construction funds are raised from self-capital, while the remaining 95% is covered by pre-purchase payments from buyers. If the post-sale system is implemented, competition among construction companies will intensify, leading to the exit of poorly performing companies and a relative decrease in apartment prices. As a result, buyers will get cheaper and higher-quality apartment products. Transitioning to a post-sale system will localize buyer preferences, weakening the competitive edge of large construction companies adept at mass supply. This will necessitate a diversification of the construction industry structure centered around medium-sized or small and medium-sized enterprises.

Concerning the disclosure of sale prices, it should naturally be implemented to protect apartment buyers and to push for taxes on excessive sale profits. However, to make the disclosure of construction and land costs effective, there should be mechanisms where the relevant authorities can refuse approval of tenant recruitment if disclosed costs are excessive.

The sale price ceiling system is part of measures to stabilize housing prices. It is a system that regulates the sale price by law, based on the idea that the deregulation of sale prices is a major cause of price increases. This system involves setting sale prices by adding reasonable profits to land and construction costs. The government revived the private land sale price ceiling system last year and expanded it to include major districts in Seoul and the metropolitan area as part of ongoing measures to control housing prices. However, it is true that the sale price ceiling system currently in effect is not fulfilling its purpose due to already high sale costs.

Third, the housing subscription system should be abolished. The target is speculators disguised as private entities. The housing subscription system was used in the 1970s when resources were scarce, and houses were built with private funds. The system has continuously evolved and changed according to market conditions. It played a role as an economic control measure to cool down the heated subscription enthusiasm in the era of absolute housing shortages and to stimulate the stagnated sale market during financial crises. However, since the global financial crisis of 2008, the stagnation of the metropolitan area’s sale market has become prolonged, raising the need for improvements to the subscription system. The original purpose of the subscription system, which was to prioritize housing for those without homes and to suppress speculation, has weakened. Housing subscription, or apartment subscription, is no longer just an opportunity to secure a home but has become a feasible dream of sudden wealth. The perception of 'lotto subscription' has become widespread among genuine buyers. As the number of participants in the subscription market increases, even those with high subscription points (over 70) do not have guaranteed success. It is almost accurate to say that subscription savings accounts, previously kept dormant, are now being poured into apartment subscriptions.

In conclusion, I sincerely hope that the community will unite and work together, both public and private, to restore healthiness. The government should not use real estate as an economic stimulus. Previous administrations often revitalized the construction industry for economic stimulation. In reality, real estate has been very effective in economic stimulation and increasing economic growth rates. The problem is that this process has led to near-frenzied increases in housing prices, and despite implementing strong measures such as increased taxes on acquisition, property, comprehensive real estate, and capital gains, and stringent loan regulations for speculative hot zones and adjustment target areas, these measures have proven ineffective. Ironically, while those in power, government officials, large construction companies, and speculators formed a powerful cartel to maximize private interests, the vast majority of ordinary people experienced increased economic disparity and relative deprivation due to skyrocketing housing prices. The best solution is to adhere to the market logic of supply and demand, where the government maximizes the supply of public mortgage-based apartments, and the private sector engages in redevelopment and reconstruction to provide a mix of sales and rental social mix-type apartments. Fortunately, in Seoul, Mayor Oh Se-hoon has recruited Kim Heon-dong, former head of the Housing Committee at the Citizens' Coalition for Economic Justice, as the president of SH Corporation, upholding his doctrine of real estate justice and practicing solidarity with the weak to secure housing safety nets. This is commendable. I dream of a day when, through such leadership, Seoul, South Korea, becomes the world’s most desirable city to live in.

☆ Author:  Atty Jeong-kee Kim ☆

● Education
- Bachelor of Arts in Political Science, Summa Cum Laude, State University of New York at Stony Brook
-  Doctor of Jurisprudence, Marquette University Law School
- Senior Executive Program, John F. Kennedy School of Government, Harvard University
- Research Scholar in North Korean Studies, Peking University

● Experience
- Consul General of the Republic of Korea in Shanghai
- Commissioner General for the Korean Pavilion at the 2010 Shanghai Expo
- CEO, Asia-Pacific Local Government Network for Economic and Social Development (CityNet)
- Secretary General, World Smart Sustainable Cities Organization(WeGO)
- Law Clerk, Milwaukee Circuit Court, USA
- Senior Attorney-at-Law, Dr & Aju LLC
- Distinguished Visiting Professor, World Economy Research Institute, Nanjing University
- Research Professor, Institute of Oriental Studies, Peking University
- Distinguished Professor, Graduate School of Political Science, Kookmin University
- Chair Professor, Graduate School of Business, Dongguk University
- First President of Soongsil Cyber University

● Publications
- Georo English Studies Series for College Students [10 volumes] (Georo Publishing)
- I Challenge the Possibility of One Percent (Chosun Ilbo)
- The Art of Negotiation (Cheongnyonneongsin Publishing)
- Korea and the World (Chekmidum Publishing)