The Necessary and Sufficient Conditions for Housing Price Stability

Robert Shiller, the world-renowned behavioral economist and Yale professor, described the state in which asset prices rise excessively due to emotions and herd mentality rather than fundamentals as "irrational exuberance." In the early 2000s, he analyzed the overheating of the U.S. stock and real estate markets and warned that excessively optimistic investor sentiment would create bubbles that would ultimately lead to crashes. True to Shiller's warning, the dot-com bubble burst and the subprime mortgage crisis threw U.S. stock and real estate markets into turmoil, wiping out countless companies. Market participants also suffered enormous financial losses.

Few places fit the concept of irrational exuberance as well as South Korea's real estate market. "Younggul" — borrowing to the hilt, even mortgaging one's soul to buy a home — and "panic buying," driven by the fear that prices will never be this low again, occur repeatedly. The second half of last year was a prime example. Housing prices, which had been creeping up since early 2024, continued their upward trajectory even through the martial law emergency and the impeachment crisis. They then surged after the Lee Jae-myung administration took office. The government, caught off guard, rolled out strong demand-suppression measures on October 15 last year, including expanded transaction permit zones and reduced loan-to-value (LTV) ratios. Yet housing prices refused to budge downward — a testament to the irrational exuberance fueled by younggul and panic buying.

The skyrocketing prices were only tamed after President Lee Jae-myung declared a "war on real estate speculation" via social media earlier this year. Through a series of measures — including ending the moratorium on heavy capital gains taxes for multi-home owners — and repeated pledges to stabilize the market, price gains in the Gangnam three districts and the Han River belt finally turned negative. But it is too early to breathe easy. While asking prices for apartment complexes in the high-end southeastern Seoul districts have dropped sharply, actual transaction prices remain elevated. Prices had simply risen too much over the past two years. There are still forecasts that listings will dry up and prices will climb again after May 9, when the moratorium on heavy capital gains taxes for multi-home owners expires.

A prevailing belief in the market holds that "governments are temporary, but real estate is forever." This persists even though the current administration, which has vowed to dismantle Korea's "real estate republic," has more than four years left in its term. While it is unclear what constitutes a stable real estate market or what an appropriate price level is, the current situation is clearly abnormal. Despite countless measures by successive administrations to address overheating and downturns, Seoul housing prices have risen on a secular trend, creating the myth that real estate never loses. The time has come for fundamental policy rather than patchwork fixes.

President Lee mentioned property holding taxes again via social media on the 24th. Tax reform is necessary for real estate market stability but not sufficient. The sufficient condition is a sustained supply of housing at an appropriate scale. Housing supply shrank under the previous administration, and an annual shortfall of roughly 90,000 units is expected to persist for the time being. Simply drawing existing housing stock held by multi-home owners onto the market has its limits. In Seoul, where apartments are packed so tightly there is barely room for a needle, the only way to add housing supply is through redevelopment and reconstruction. It is time to consider abolishing the reconstruction excess profit recapture system — a regulation that has become ineffective in practice yet still acts as an immovable obstacle to urban renewal projects.

The housing supply measures announced on September 7 last year failed to cool price gains because they lacked a "decisive knockout blow." The additional supply measures announced on January 29 this year drew a similarly lukewarm market response, even though they included promising locations such as the Yongsan International Business District and the Gwacheon Racecourse site. To send a definitive supply signal, why not pursue new-city-scale development in areas adjacent to Seoul, like Pangyo and Wirye? For instance, relocating Seoul Air Base in Sujeong-gu, Seongnam and building a self-sufficient, live-near-work city on the site could be considered. Linked with the Pangyo Techno Valley, it could become "Korea's Silicon Valley," absorbing and dispersing a significant share of Gangnam demand. Admittedly, the feasibility is not high. Still, this is a proposal born of the belief that bold housing supply plans — introduced at a moment when expectations of rising prices have cooled — are what it takes to stabilize the real estate market without reigniting irrational exuberance.