Regulations, Not Speculation, Are the Real Cause of Soaring Housing Prices

Su Yeon Jung

Chair, Real Estate Policy Research Committee,

Hansun Foundation for Freedom and Prosperity

1. Why Policies Should Not Be Designed on Good Intentions Alone

- Economics warns that policies intended to correct problems often end up worsening them.

 Most introductory economics textbooks teach students a basic lesson early in the semester: the “paradox of regulation.” When the government imposes regulations because apartment prices are “too high,” prices do not fall. Instead, they rise even higher than before regulation.

 The government tries to lower prices out of concern for ordinary households who cannot afford a home. Yet the result becomes paradoxical: the policy intended to protect them makes homeownership even more difficult. This is why people end up saying, “You should have just left the market alone.” Economics therefore teaches future policymakers to always be cautious.

 Marshall’s well-known maxim “Cool head, warm heart” is one of the sternest lessons economics professors give their students. Trying to realize justice too hastily can end up making people worse off; thus economics emphasizes that policy must always be built upon cool and rational judgment.

2. Attempts to Suppress Demand End Up Fueling It

- Regulatory policies fail to reduce demand and instead heighten anxiety.

 The government regulates prices because it aims to suppress demand. Since most people learned the “law of supply and demand” in high-school social-studies or economics classes, they know that prices rise when demand increases. It therefore seems natural to think, “If demand decreases, prices will fall,” and from there to conclude, “To reduce demand, the government should prevent people from buying homes or eliminate capital gains through higher taxes.”

 However, the market does not behave so simply. Regulation does not suppress demand; it often stimulates it. Many people overlook the fact that demand is strongly influenced by expectations about the future. This is especially true in the housing market, as basic demand-function theory in introductory economics already explains. As government regulation intensifies, citizens think: “Opportunities to buy a home will shrink even further. If I don’t buy now, I may never own a home.”

 This anxiety becomes a powerful psychological driver and causes expectation-based demand to surge. Demand that was meant to be suppressed ends up expanding because of fear about the future.

3. When Transactions Are Blocked, Supply Becomes Locked Up

- The land-transaction permit system has created a trap of locked-up listings.

 Following the June 27 and October 15 measures, the government designated an unprecedentedly wide range of regions as land-transaction permit zones, creating a serious “listing lock-up” phenomenon. Currently, in 12 locations across Seoul and the capital region, anyone buying an apartment must undergo intensive scrutiny of the source of purchase funds. Few people are willing to bear such a burden.

 Will prices stop rising simply because transactions decline? They will not. A decline in transactions means fewer existing apartments entering the market, which means reduced supply. When supply decreases, prices naturally rise.

 Many people think “supply” refers only to newly constructed housing. But supply includes not only new construction but also the inflow of existing apartments into the market their listing. This conceptual shift is necessary. The land-transaction permit system becomes a powerful restriction that prevents existing homes from entering the market. When supply is blocked, prices rise an elementary principle even middle- and high-school students learn.

4. The Public Already Understands This Policy Is the Only One That Doesn’t

- When policymakers misread reality, the market has already made its prediction.

 Are citizens unaware of these dynamics? Koreans are among the most highly educated in the world. Most already understand that once regulation begins, supply shrinks and prices rise. This expectation is already widespread in the market.

 Does the government truly believe demand has been suppressed? Will instilling fear really weaken the desire to buy? Reality shows otherwise.

 New housing supply takes at least five years from planning and land compensation to construction and completion. Simply announcing future supply therefore cannot stabilize the market. Citizens already know that housing supply requires time knowledge that even introductory economics provides.

 New supply takes years, while regulatory measures block existing homes from entering the market. Because citizens know this reality better than anyone, they naturally expect future prices to rise. As a result, demand is not restrained it is exploding.

5. Stabilizing Expectations Is the Only Effective Policy

- Reduce anxiety and restore trust in future supply.

 “Expectations” should not be misunderstood as simply “hopes of earning speculative gains.” Fear “What if I cannot buy a home in the future?” is also a central component of expectations.

 Today, 12 areas in Seoul and the capital region are subject to overlapping regulatory designations adjusted areas, speculative overheated districts, and land-permit zones. Strengthened mortgage rules since the June 17 measures have produced a dual anxiety: “There are no homes I’m allowed to buy,” and “Even if there are, I cannot afford them.” Outside the capital region, residents fear demographic decline and feel pressured to secure “one solid home” in Seoul. Additional surcharges on acquisition and capital-gains taxes intensify this compulsion. To calm fears of “unaffordable housing,” the government must send credible signals of expanding supply. Three policy measures are essential:

First, Unclog the Existing-Home Market

 Supply does not come only from new construction. Existing apartments entering the market are also a crucial source of supply. But the land-permit system and the surcharges on acquisition and transfer taxes block this supply. Tax easing should be used to induce more listings. Citizens have already learned from 28 rounds of past regulations that regulation does not lower prices; it pushes expectations higher and drives prices up.

Second, Let the Private Sector Lead New Construction

 New housing supply should be entrusted to private developers. Signals that LH will expand public supply create anxiety “Private-brand apartments will become scarce.” Consumers want homes in their desired location, of the quality offered by private brands. If supply does not match demand, prices will not stabilize. Instead, the scarcity of existing private apartments increases and expectations overheat again.

Third, Abolish the Reconstruction Excess-Profit Recapture System

 Mechanisms that undermine private-sector willingness to supply must be removed. Only the expectation that abundant private apartments will be available can ease buyer anxiety. Panic buying stops when people feel: “Even if I don’t buy today, a similar home will be available tomorrow.” Some argue that excessive profits on high-end apartments should not be allowed. Yet this belief becomes a barrier to supply. When high-end homes are supplied, residents of mid-priced homes move up, increasing the supply of mid-priced homes. Lower-priced homes experience the same filtering process. This “filtering effect” is a fundamental principle of housing economics. Supply whether high-end or low-end helps stabilize prices.

6. Conclusion: Housing Policy Captured by Politics- A Shift in Thinking Is Needed

 Is there any policymaker with the courage to pursue these reforms? Such measures cannot be implemented in a political environment dominated by rhetoric about “justice.” Korea’s housing policy remains trapped in politics that ignore basic supply-and-demand principles. By repeatedly fighting against economic fundamentals, policymakers have driven prices higher and made homeownership more difficult for the very households they aim to help. A change in perspective is now essential.

To Increase Supply, Acknowledge Reality

 We must recognize economic principles and redefine the roles of the public and private sectors. Citizens do not simply want “a house.” They want a home in their preferred location mainly Seoul and the capital region with the quality provided by private-brand housing. No amount of public housing can stabilize prices if it does not match consumer preferences.

The Public Sector Should Do What the Private Sector Cannot

 For example, permanent rental housing for low-income households projects with low profitability is the proper role of LH. By contrast, housing demand from middle- and upper-income households should be left to the private sector. When the public sector expands into areas already served by the private sector, employment shrinks and supply becomes distorted.

Capital-Region Concentration and the Need for Alternative Locations

 Another challenge is the concentration of housing demand in the capital region. Regulations that fuel the obsession with securing “one solid home” must be eased. At the same time, the government must create attractive alternative locations outside the metropolitan area. This requires not mere regional development but a comprehensive national spatial-development strategy that builds genuinely livable areas education, healthcare, transportation, jobs, and cultural infrastructure. Creating alternatives to the capital region will not yield immediate results, but it must be approached as a long-term national survival strategy.

Note: The views expressed herein may differ from those of the Hansun Foundation.

(※ It's a translation based on machine translation)