Housing Policy Seoul, Korea - Research Paper Example

Housing Policy in Seoul HOUSING POLICY IN SEOUL Introduction The process of urbanization in Seoul, South Korea, has been intense over the past thirty years, as has the capabilities of urban administration to manage this process. Seoul, over the course of the 20th century, has grown into one of the largest cities in the world with the most condensed and rapid transformation witnessed in the world (Yoonseuk, 2012). From a population of just 900,000 people after the Second World War, the city in 1998 reached a population of 10 million before slightly falling to its present population of 9.82 million. Moreover, the city has also experienced extensive sprawl and suburbanization, growing into a metropolis of twenty million citizens in neighboring provinces and cities. In the face of this abrupt and phenomenal expansion, Seoul metropolitan Government has had to manage emerging urban challenges with a fair share of lamentable mistakes and success stories (Yoonseuk, 2012). As part of a two-tier local government administration, Seoul Metropolitan Government is involved in policy-making for the entire metropolitan region. Seoul has been at the center of a remarkable boom in residential buildings, in which older houses have been replaced by newer ones that with increased density (Yoonseuk, 2012). The inner cities, specifically, have seen phenomenal renewal over the past twenty years, both in terms of pace and magnitude. Managing this growth across the entire metropolitan area has been one of the most challenging issues of planning for the Seoul Metropolitan Government, especially in light of the Jeonse system that is unique to South Korea and has resulted in unique challenges for Seoul. This paper will discuss the unique challenges facing Seoul, as well as how the Seoul Metropolitan Government has reacted to these challenges in way of housing policy. Finally, the paper will present an evaluation of these policies with regards to their success. Challenges in Seoul’s Housing System The low interest rates and the lengthy slump in the housing markets In South Korea as a result of the Asian financial crisis and the global financial crisis threatened the very future of the jeonse system, which is a unique and long-standing home-lease system that stretched back to the 19th century. These jeonse contracts have been a mainstay in Seoul since it was founded over a century ago. In this system, the tenant, rather than paying rent monthly, pays the landlord a lump sum, up-front deposit that is normally ~40% of the houses value (Yoo, 2014). After a lease period of two years, the landlord can either renew the lease or refund it in its entirety. This system reached its peak in Seoul around the late 90s, during which at least 75% of all housing leases and rents were under the jeonse system. Under this system, the landlords benefited mainly from the large capital sum that could then be invested in opportunities with potentially high yields. Such opportunities were especially in abundance during the 80s and 90s when interest rates were often in double digits, while industrialization and economic growth were at their peak (Yoo, 2014). The jeonse system was also a boon for homebuyers purchasing property for the first time, especially as mortgages were not widespread due to government policies that offered incentives for banks to loan money to manufacturing firms (Yoo, 2014). Essentially, the property leased to a tenant under jeonse could be traded at a price that excluded the deposit paid up-front. Thus, the homebuyer could get a house at a much lower price, despite the fact that they would then have to pay the deposit to the tenant prior to occupying the home. In this case, the deposit was used as a bank loan that the buyer would have to pay in the future after making investments and saving enough money to move into the house. However, according to Chin et al (2012), speculators began to buy houses leased under jeonse at discounts to sell at a profit, which was based on a surge in the price of real estate in Seoul especially, which, in turn, fanned the real estate market even more. House prices soared by a stunning 136% in Seoul during the surge, particularly as jeonse became a novel way of increasing personal wealth, sustaining the system over decades (Chin et al, 2012). The changing market conditions, however, brought this surge to a halt due to socio-economic factors like the financial crisis and an ageing population. Particularly after the financial crisis of 2008/2009, property prices and interest rates fell, significantly undermining the foundations of the entire housing system (Chin et al, 2012). These low interest rates impacted heavily on landlords by limiting investment opportunities, forcing them to switch to a monthly rental system and away from jeonse. By 2010, for example, rentals accounted for ~50% of all housing leases, compared to 30% in 1995. During the same period, jeonse leases dropped to 50% from 67% of total leases (Chin et al, 2012). In addition, hopes by jeonse tenants that prices would fall further and the switch to rental housing have led to a sharp decline in new jeonse contracts as supply is outstripped by demand and jeonse deposit prices sky-rocketing. At present, the jeonse deposit is ~65% of property value in comparison to ~48% in 2008 (Chin et al, 2012). While the jeonse system will not completely disappear, landlords are expected to push it out over the long-run with increased demands for monthly rents. This has put middle and lower class citizens of Seoul in a difficult situation as they now have either to pay high monthly rents or pay extraordinarily high jeonse deposits. The increasingly unaffordable nature of jeonse leases for Seoul’s middle class has increased the demand for apartment prices, in turn increasing the price of rental housing as demand outstrips supply (Chin et al, 2012). The low interest rates in the South Korean economy have made more money available for paying jeonse leases, thus increasing demand and price. Together, these factors have brought huge changes to the Seoul housing sector. As it becomes more difficult to find jeonse housing leases at affordable prices, prospective tenants are being driven into the suburbs where housing capacity is still not adequate. Ronald and Lee (2012) argue that the search for affordable housing in Seoul will continue and grow more difficult by the year 2010, especially with jeonse lease deposits expected to increase by a further 50% by then. The shortage of jeonse apartments in Seoul and the subsequent pressure on rental apartments have been a problem since 2008, making it more expensive for Seoul citizens to purchase a home than to lease one. As more people now turn to rental housing, the demand for the rental houses has been pushed up, creating a housing challenge for the Seoul Metropolitan Government. The jeonse system has also been identified as a risky undertaking by foreign investors, especially as it is rooted in the household debt problem that has been shadowing Seoul since the Asian financial crisis and came to the fore most evidently during the global financial crisis (Ronald & Lee, 2012). As the low interest rates offered by the government have tempted more residents of Seoul to borrow jeonse deposits, the debt situation has been exacerbated. The over $40 billion held up in jeonse deposit loans continue to burden Seoul households, which has also been a critical factor in the change of perceptions towards jeonse and the preference of monthly rentals. As the jeonse deposits increase and the younger generation is either unable or unwilling to pay a jeonse deposit, tiny urban-style apartments have began to crop up to meet the demand for monthly leases. Whereas the supply side of the jeonse system proved profitable for homeowners in the past, as they only required a relatively small additional sum on their jeonse deposits to buy another apartment for rent, current taxation measures have hit multiple homeowners hard (Ronald & Lee, 2012). This has resulted in lesser investments in the housing industry by jeonse landlords. This is another reason why jeonse homes are in such short supply, straining the rental market that is unable to accommodate the new demand. Seoul’s Metropolitan Government’s Response to Housing Challenges As a reaction to plummeting jeonse system housing supply and the subsequent increased demand for rental housing, the Seoul Metropolitan Government has tried to rectify the situation through giving incentives to jeonse landlords to convert their properties into monthly rental leases (Ha, 2010). This is in addition to attempts at suppressing Seoul demand for jeonse housing, especially by encouraging citizens to buy housing instead of renting it. This has seen the Seoul Metropolitan Government promoting the sale of homes for those with the means to buy homes outright, which is expected to reduce jeonse home demand. The government, for example, has endorsed the shared mortgage system that encourages people with sufficient money to put up a down-payment of 5% and become eligible for a low interest rate government loan for the rest of the price (Ha, 2010). Moreover, the buyer will have up to 40 years for them to repay these loans, giving middle-class non-homeowners the opportunity to purchase a house. This way, the government seeks to relieve pressure on the jeonse lease system and rental housing systems by encouraging jeonse landowners to sell their houses to potential home-owners. The Seoul Metropolitan Government is also implementing development measures aimed at activating public rental houses, as well as continuous supply of the same, through the new-concept public housing system (Ha, 2010). Under this initiative, the government plans to supply innovative and diverse public housing units that will meet the demands of various consumers. For example, low-cost and high efficiency housing is expected to include the building of modular houses beneath highways, as well as recycling of old offices owned by the government. On the other hand, welfare service-associated housing will involve the remodeling of tiny single rooms to create medical safe residence for older low-income citizens on a mortgage. The Seoul Metropolitan Government is also responding to demand changes through the improvement of systems, especially by establishing special regulations on the building of public houses, systemizing innovative public housing, and mandate regulation after amendment of the Special Public Housing Act by the South Korean government (Ha, 2010). This is meant to ensure that the best and most effective use is made of available land to maximize on housing units. The Seoul Metropolitan Government is also seeking to implement a move-in/move-out cycle system over the next 6-10 years modeled on the tenant life-cycle, during which they will operate rental houses according to convenience, as well as activated community (Ronald & Jin, 2010). In addition, the Seoul Metropolitan Government will, in cooperation with the independent districts known as Gu, supply public rental houses. This is being done through the expansion of housing supply with the support of the South Korean central government, making it compulsory to construct rental houses and welfare facilities, and paying districts different amounts of subsidies on the basis of the number of rental houses constructed (Ronald & Jin, 2010). This is expected to go some way in meeting the increased demand for rental housing. In order to overcome the relatively low levels of public rental houses in the face of increasing demand, the Seoul Metropolitan Government has been encouraging private and semi-public rental houses, while also easing financial regulations like the national housing fund and taxes (Ronald & Jin, 2010). In addition, the government is also promoting the growth of corporate-style providers of rental services. As the citizens of Seoul are increasingly unable to own houses due to the increase of jeonse deposits that have made out-right buying of houses even more difficult and towards the renting of houses, the government has taken several pro-active measures to make sure that tenants have stable housing. For example, the government has implemented rental-housing policies that are differentiated and dependent on the income of the potential tenants (Ronald & Jin, 2010). The metropolitan government in Seoul has also sought to strengthen safety networks for residential citizens, in this case by protecting them from issues caused by changes to the housing market with the gradual phase-out of the jeonse system (Jun, 2013). This has also involved the easing of housing expenses via rental adjustment, consultations, loan support, and offering legal assistance at the support center for rental security deposits. The government has been taking measures aimed at rental housing for both monthly rent and deposit basis housing, such as control of maintenance periods using moving demands, conducting and availing market analysis, offering housing vouchers, and expanding financial support in collaboration with the South Korea central government (Jun, 2013). This includes activating the use of the government center for rental deposit assistance through the development of new programs, expansion of support services for the citizenry, and improvement of related services. Currently, the Seoul Metropolitan Government has been expanding measures aimed at residential welfare through the provision of systematic support for marginalized citizens that are unable to afford the current rent rates or to buy a house (Jun, 2013). In addition, the government is also constructing a system for residential welfare via improvement of facilities, financial support, and constructing community space. The housing voucher program is being expanded at pace with the central government voucher program, while the government is also providing loan support to pay rental fees for the low-income population without housing. Moreover, the government is also providing support for security deposits for residents seeking to live in public rental houses. The empty jeonse houses that are still to be settled in because of their high deposit prices are also being bought by the Seoul Metropolitan Government and converted into public housing, especially by sub-dividing them to create more housing units for marginalized, low-income groups (Jun, 2013). Finally, the Seoul Metropolitan Government has sought to improve its systems of management by integrating different types of rental houses, as well as helping its residents to be more self-reliant in order to help them buy low-cost public housing and free up housing for more needy citizens (Park et al, 2010). The city is also improving rental houses by easing residential expenses through a welfare community, as well as a resident-centered management system. Seoul’s metropolitan government, in this case, will expand move-in chances for its population by differentiating housing rental fees for those with different incomes and inducing social mix. This will mean that people of different classes and ages will be housed in proximity to one another, preferably in the same apartment building, to reduce rental housing zoning that may lock out those without enough money to pay increasing rents. In order to improve public management systems for public rental housing, the tenants will be encouraged to operate cooperative management systems or self-management systems (Park et al, 2010). This will ensure that the multi-household rental housing system will have a greater chance of success. Analysis of Seoul Metropolitan Government’s Housing Policy As the Seoul Metropolitan Government forges ahead with this housing policy to induce jeonse landlords to convert their lease to monthly rents and enabling citizens to afford the rent rates, the housing market seems to be stabilizing at the moment in terms of pace and magnitude. However, Kim (2011) notes that the planning and housing history of Seoul evidences the fact that planning regulations are affected significantly by economic and national housing policies, as well as by partisan election strategies. With minimal far-reaching housing and urban agenda to tackle the ripple effect caused by the relatively unaffordable jeonse lease system, it is expected that rent rates will continue to be high and that housing prices under the jeonse system will be unaffordable for the near future. It is, therefore, essential that the Seoul Metropolitan Government assess their impact on sustainable growth and housing production, rather than conversion of jeonse holdings to rental holdings (Kim, 2011). The current policies, however, have significantly upgraded the housing stock in Seoul without over-spending public money This has been made possible by the government’s use of the gap between new and existing plot ratio, which has attracted investments from the private sector. However, there are questions as to whether this mechanism will be effective and applicable during Seoul’s next cycle of residential formation, especially with regards to whom pays for this next phase if the mechanisms is inapplicable and how they will pay for it (Lee et al, 2014). In the event that there is no economic merit left in this policy, the issue of how the housing stock is to be enhanced or maintained may become a serious challenge. The jeonse system was the main causative factor for increased residential density and with the current policies, the question remains as to whether the metropolis is being changed into a compact development state. For example, increased densification in the inner cities may not be enough to curb the intense suburbanization of Seoul. Moreover, gentrification of Seoul’s residential areas under market forces raises the question as to whether Seoul will have a better opportunity to attract and maintain middle class citizens who may escape to the already overcrowded suburbs as a result of rising rents (Lee et al, 2014). Finally, with the housing aspirations by the lower and middle-income citizens, the housing policy has to be matched with economic and social policies. This raises the question as to whether the housing transformation being undertaken by the government should take place in the same way as these other policies to sustain economic growth and the construction industry, or whether it should be doe incrementally on a small scale (Kim & Cho, 2010). Thus, the Seoul Metropolitan Government is faced by a dual challenge to its urban management policy. While the fringe areas of the city are undergoing intense suburbanization as people move away from the city due to unaffordable jeonse lease deposits and increasing rent rates, residential building density is changing Seoul’s inner city patterns and structures (Kim & Cho, 2010). The way in which the government analyzes and interprets this metropolitan phenomenon that is unique to Seoul and South Korea seems to be as critical as the provision of solutions and answers. Policy Recommendations Seoul society has undergone drastic changes in the last twenty years, including in the housing sector. With its ambitious policies aimed at increasing the number of rental houses by giving incentives for jeonse landlords to convert to rental houses, as well as easing taxes and regulation on building of private and semi-public housing, the Seoul Metropolitan Government has set out to increase supply of monthly rental houses. Taking these policies and the challenges that have faced their implementation, there are several recommendations that can be given to the SMG, some borrowing from best practices in cities across the United States. As seen in the discussion above, some of the SMG policies have been at least partially responsible for distortions in the housing market as evidenced in the low demand, supply, and production parameter estimates. In a sense, these policies have been detrimental to housing production expansion, as well as the provision of housing variety for all income groups in Seoul (Dolling, 2013). Since, these policies have inadvertently emphasized on the regulation aspect, rather than promotion of the housing industry, there is a need to overhaul some policies, especially the Housing Construction Promotion Law, by terminating their statutory power (Dolling, 2013). The housing industry, at the same time, should be promoted actively by strengthening the housing finance system to aid medium and small-sized builders take part in the development of housing. The key strategy, like in the US, is to ensure that there are several capable firms in the market competing in the production of good housing. The SGM can also learn from the US in the area of infrastructure financing in the promotion of residential development. In the US State of Tennessee, increased reliance on impact fees by city authorities to aid in covering growing service costs saw potential and existing homeowners suffer from the fees that manifested as home buying tax, pricing most out of the housing market (Schwartz, 2010). Local governments began to use innovative strategies in the management and financing of infrastructure, such as Federal Credit Assistance Tool that improves access to credit for project sponsors via credit and loan enhancements to accelerate and better manage project delivery (Schwartz, 2010). What is evident is that, for SMG, development of urban housing infrastructure should be tied into the capital market. The SMG could also use tax incentives to promote the housing industry by discouraging the building of jeonse apartments and luxury units and, instead, promote moderate and low-income housing construction. Again, as in the US, national and local taxes should be combined in order to maximize effects of tax disincentives and incentives. Moreover, taxation and financial tools may be used to manipulate housing demand indirectly by using tax measures to normalize hosing consumption behavior. The SMG should also seek to reconcile their housing policy with national economic policies, which have been found to discourage investment in the housing industry (Dolling, 2013). For instance, the SMG may seek to regulate housing investment to be consistent with such national economic policies as full employment and economic stabilization. References Chin, M., Lee, J., Lee, S., Son, S., & Sung, M. (2012). Family Policy in South Korea: Development, Current Status, and Challenges. Journal of Child and Family Studies, 21, 1, 53-64. Doling, J. (2013). Comparative housing policy: Government and housing in advanced industrialized countries. Basingstoke: Macmillan. Ha, S.-K. (2010). 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