Why Moon Jae-in Administrations’ Failed Real Estate Policies Must be Undone

The goal of any democratic country is to elect a supreme leader who will work the hardest to implement policies that will benefit the citizens. However, when elected supreme leaders’ political parties fail to gain control of their legislative branch, the supreme leaders often quickly degenerate into lame ducks. Therefore, most South Korean citizens, having faith in President Moon Jae-in, believed that it would be more advantageous to elect legislators who belong to the same political party as that of the president. As a result, in a national election that took place on April 15, 2020, Democratic Party was able to secure 174 of 300 seats in the National Assembly.

The Democratic Party, controlling 58% of the National Assembly seats, no longer needed to ask for the support of opposing parties and had absolute power to implement policies. What most South Korean citizens failed to realize is that such power is a double-edged sword. President Moon Jae-in has the potential to implement not only well-thought-out policies that can immensely benefit the citizens but also poorly designed policies that can infinitely harm the citizens. Unfortunately, President Moon Jae-in’s administration has done so much of the latter that his approval rating, which exceeded 78% in August of 2017, dwindled to 38% on December 11, 2020 (Gallup Korea Daily Opinion Report #429).

While political analysts attribute President Moon Jae-in’s deteriorating approval ratings to multiple factors, one predominant reason for his waning approval ratings is the soaring real estate prices. Having absolute power to implement policies, the Moon Jae-in administration implemented new real estate policies on twenty-four occasions (as of November 19, 2020) to lower real estate prices. However, these policies only ended up yielding exactly the opposite effect. According to KB Bank, apartment prices in Kangnam, which approximately costed KRW 20,000,000 (USD 18318.37) per 3.3 m2 (35.5209 ft2) before the administration began, now costs KRW 43,453,000 (USD 39799.41) per 3.3 sqm. In other words, a home that is about 344 ft2, which normally would have 3 bedrooms, 1 living room, and 2 bathrooms, would cost KRW 1,390,496,000 (USD 1,273,581). Since this is the average price, people may have to pay more than $3,000,000 for newer or more conveniently located apartments of the same size. Regrettably, unless President Moon Jae-in recognizes that his quixotic policies are incompatible with this imperfect world, this trend will continue.

The real estate market in South Korea operates on capitalist ideals, which dictates that real estate prices are decided by the workings of supply and demand. Thus, the easiest way to lower real estate prices is by increasing the supply. The problem is that the Moon Jae-in administration’ policies have not succeeded in increasing the supply.

First, one effective way to increase the supply of real estate properties is to raise the real estate ownership taxes. This is a powerful measure that can increase the supply by making real estate ownership less attractive and motivating the owners to sell their properties. Therefore, if used effectively, it has the potential to immediately lower the real estate prices. However, despite raising the real estate ownership taxes, because President Moon Jae-in’s administration provides tax reliefs to single-house owners, which can be as high as 80%, relatively few people pay the high property ownership taxes. Also, despite the higher real estate ownership taxes, those who own multiple homes are holding on to their properties because the tight supply makes it possible for them to find tenants to whom they can pass on the higher cost of ownership by charging their tenants higher rent or requiring higher jeonse deposits. The administration, therefore, rather than increasing the supply, ended up limiting it by failing to provide anyone with any reason to sell.

Second, another effective way to increase the supply is by deterring potential buyers from purchasing real estate. However, this must be accomplished by means other than increasing acquisition tax and/or the capital gains tax, which are the measures that President Moon Jae-in’s administration decided to implement. While these methods may appear to have the potential to increase the supply by deterring potential buyers from purchasing real estate properties, they only end up freezing the supply. This is because the higher acquisition tax, which is 8% for those looking to purchase a second home and 12% for those looking to purchase a third home, makes it more difficult for the owners to sell their properties to potential buyers. Thus, a potential buyer, who already owns two homes would have to pay $240,000 just in acquisition tax to purchase a home that costs $2,000,000. The higher capital gains tax, which can be as high as 70%, dissuade owners from selling their properties. As is proven by the higher real estate prices, it is evident that deterring potential buyers from purchasing real estate is not the most effective way to increase the real estate supply.

Lastly, the final measure that Moon Jae-in’s administration put in place is making real estate collateralize loans more difficult to procure. Again, this measure may appear to have the potential to increase the supply by discouraging potential buyers from making purchases but ends up having exactly the opposite effect. When it becomes impossible to get loans, the citizens are forced to purchase the less expensive properties, which would drive up the price of these properties until they also become too expensive to afford. Of course, the prices of the already expensive, more attractive properties would rise even more.

It is impossible to increase real estate supply overnight because it takes time to build apartments and homes. At a hearing on November 30, 2020, even Kim Hyun-mee, the former Minister of Land, Infrastructure, and Transport, admitted to this fact when she said, “If I apartments were bread, I would bake all night.” However, the Moon Jae-in administration must act quickly. It cannot afford to sit idle and do nothing because the bubble keeps growing larger and the consequences a larger bubble’s bursting will be more excruciating.

The only way to effectively increase the supply and deflate the bubble is to eliminate jeonse, a real estate rental system that is unique to South Korea. In this system, the tenants make a lump-sum deposit rather than pay a monthly rent. This system played an important role in providing people with homes when the modern banks didn’t exist. However, now, average citizens can easily get real estate collateralized loans. Thus, it is only reasonable that the jeonse system be eliminated. It is the continual existence of this outmoded system that has allowed real estate speculators to secure interest free loans from the tenants, to speculate on estate properties by risk minimal capital of their own, and to risk their tenants’ money.

Although the tenants historically made deposits that amounted to approximately 50%-60% of the properties’ market value, due to low interest rates and drying up availability of jeonse properties, tenants are now paying up to 100% of the properties’ market value, which can be extremely risky for the tenants. For example, to rent an apartment that is valued at $2,000,000 using the jeonse system, the tenant used to make a deposit of $1,000,000 to $1,400,000, but now, with the shortage in supply, people make deposits up the entire $2,000,000. In other words, the owner of the party can have relatively little equity in the property. Hence, if the bubble bursts and the properties decline in values, it is possible that the property owners become insolvent and that the tenants lose even the entirety of their deposits. However, since the tenants most often acquire their jeonse deposit through loans from banks, if these tenants become insolvent, the South Korean banks may find themselves in serious trouble. This is the reason that the banks are now tightening their lending. Therefore, it is critically important that the jeonse system be eliminated. By getting rid of this old system, not only would the Moon Jae-in administration eliminate the undue risks that the tenants and the banks are forced to take but also increase the real estate supply and lower real estate prices by forcing real estate speculators to sell properties that they have purchased with their tenants’ money.

Since no government has attempted to get rid of the jeonse system, it would be difficult for the Moon Jae-in administration to attempt to get rid of it. It is also foreseeable that both the owners and the tenants of the jeonse system dissent. It is also likely that the tenants would launch stronger complaints, for they now must pay monthly rent. Lastly, it is predictable that the Moon Jae-in administration will do nothing about the system because it tends to side with the weak, which in this case would be the tenants. Yet, despite the Moon Jae-in administration’s hard work and best of intentions, it has only done lip service that appeals to the populist but doesn’t benefit the general public. In fact, since the administration began, the middle class has shrunk and the chasm between the upper and the lower classes have only become bigger. Now, for the not-haves, the goal of owning a home is no longer an attainable goal but only an unattainable dream.

Unprecedented times, however, calls for unprecedented measures. It is also wrong to do nothing about the jeonse system when the administration knows that it is the single greatest factor that is responsible for the tight supply and artificially inflated the real estate prices. It is also wrong for the Moon Jae-in administration to not accept its failure in forcing idealistic policies that are simply not incompatible with reality. Even the Bank of Korea, on December 16th, 2020, attributed the rising real estate prices to Moon Jae-in administration’s real estate policies. One thing is clear. If the Moon Jae-in administration does not find a solution soon, it will do irreparable harm to the citizens and leave a legacy that is only blemished with incompetence.