제3강 정부간섭과 한국주택시장(written by Deokho Cho)

MBC 강의:

100M달리기에서는 단 한사람만이 1등이고 나머지는 기록에 따라 등수가 매겨진다. 그럼 새로이 변화하는 사회에서 모두가 1등을 하는 방법은?(각자 다른 방향으로 뛴다)

낮선 길을 가라(정보사회의 전환은 모든 분야가 낮선 분야다), 기본에 충실하라(정보사회는 철저히 자기 노력에 의해서 이루어진다. 따라서 동승이 불가능하며, 모든 것은 개인적인 노력과 능력에 의해서 결정된다. 예를 들면 학번, 기타 개인적인 배경은 별다른 문제가 되지 않는다), 각자 쓰임이 다르다(꼴통, 개성, 능력 창의성시대), 인간성과 협력과 제유(대학생 MT와 정보기술: 우리학교 학생들),

그럼 새로운 분야란 무엇일까? 기본적으로 융합의 시대: 휴대폰, 연필과 지우개, 크루즈 선, 에너지와 물이 궁극적으로 지속가능한 발전의 모태이다. 대동강 물 팔아먹은 봉이 김선달

Rationality of Governement Intervention in the Korean Housing Market

I. Introduction

     In most countries in the capitalist world, the government in the housing market has intervened to remedy several kinds of market failures such as natural monopoly, the existence of externalities, unequal income distribution, and imperfect capital markets.  The degree of government intervention depends on the political ideology that each country adheres to.  However, government intervention has often raised several problems such as increased housing price, distorted income distribution and inefficient utilization of resources, even though it has contributed to the improvement of dwelling conditions of the people.  

     The purpose of Korean housing policy has been to increase the housing affordability of below middle-income people through providing them with ownership of new housing.  However, this policy has raised several problems which include market segregation, interruption of participation of low-income people in the housing market, and the rise in housing prices.

     The objective of this paper is to suggest a way of improving the housing affordability of below middle-income people, by considering problems of Korean government intervention, which is based upon principles of liberal democracy in a market economy.  First, this paper reviews and examines the rationales for government intervention in the housing market.  Second, it evaluates how the Korean housing policy has influenced the improvement of dwelling conditions of below middle-income people.  Third, it will suggest some methods for improving their housing affordability.

II.  The Rationales for Government Intervention in the Housing Market                                                      

     Modern governments provide a variety of services such as housing, education, and the system of justice and laws (Brown and Jackson, 1982).  The extent to which governments provide social goods and services depends in large part upon the political ideology which each country adheres to.  Depending upon the process of decision-making (Nesslien, 1983) and the degree of government intervention, housing models can be broadly categorized in three ways: 1) the market model; 2) the planning model; 3) the welfare model (Mcguire, 1981).  

     In capitalist society, general rationales for government intervention largely rely on the existence of market failure, in that the market mechanism fails to provide social goods and services; and on the normative belief that the social goods and services should be allocated and distributed to the people who need them.  More specifically, market failure in housing might be correlated with its particular characteristics which include the locational fixity, durability, heterogeneity, high transaction and mobility costs, and a close link between the housing and credit markets.  

1. Economic rationales of Government Intervention in Housing.  

1) Housing Market Externalities

     Two basic kinds of externalities can arise in housing markets (Saffran, 1976: Nesslein, 1983): 1) externalities relating to property values; and 2) the social costs of slums. The former particularly arises in urban real estate markets because the value of specific dwelling units depend, in part, on the quality of neighboring dwellings.  This argument is based upon the framework of game theory.  Individual property owners generally only consider the private returns to be gained from repair and renovation, whereas social benefits may be generated if all neighbors agree to upgrade their properties simultaneously.  In effect, property owners might fall into a 'prisoner's dilemma' and, in the absence of general agreement, the level of housing investment may be less than socially optimal (Davis and Whinston, 1961).        

     It might be not true that such externalities imply resource misallocation.  Since these external effects are reciprocal, strong social pressure or joint agreement may exist in neighborhoods, inducing residents to maintain their properties. In essence, property owners may agree implicitly to internalize the externality (Saffran, 1976: Henderson, 1977; Nesslein, 1983).  However, it is very difficult to document the level of internalization of these externalities.  The empirical literature fails to document significant externalities, and Nourse (1976) argues that American Federal government programs such as urban renewal and public housing have not been effective in generating external effects.  

     The social cost of slums has been discussed at length by most housing analysts.  They argue that housing of a absolute low standard leads to the increased incidence of fire, crime and delinquency, disease, and mental illness.  However, this argument might have its roots in a negative view of slums.  For example, while crime and contagious disease clearly have external effects, the empirical evidence generally fails to establish a significant link between housing and the alleged social ills (Freedman, 1975; Fisher et al, 1975, Schmitt et al, 1978).  

     Kim (1989) argued that the poor, who live in slum areas, have utilized resources most efficiently because they try to maximize their utilities under the constraints of their low income even if their housing quality is low.  Furthermore, reviewing 178 empirical studies on the link between housing and the alleged ills, Kasl (1976) concluded that these studies have been implemented in order to test hypotheses that improved housing results in 1) increased job opportunity, 2) increased educational productivity, 3) improved health, and 4) decreased social deviance instead of establishing the direct link between slum and social ills.    

     Accordingly, even if housing market externality factor is theoretically the ground of government intervention in housing, empirical studies are not convincing that the externality rationale provides a solid ground for government intervention in housing.  

2). Housing Market Imperfection

     Many scholars argue that imperfect information is a cause of market failure, and it is a rationale of government intervention in the housing market.  However, this view might be misleading because perfect information does not exist, and is not a cause of market failure but simply a fact of life (Nesslein, 1983).  This argument is based upon the idea that institutional arrangements ill provide decision-makers with the best information under this constraint.  

     With respect to the supply side of housing, the duality of housing capital leads to great uncertainty about future housing prices, inducing private investors to underestimate the future return of housing investment.  Because of this risk, housing investment is accomplished at a less than socially optimal level in housing (De salvo, 1976).  However, there seems to be little basis to the assumption that the substitution of public for private investors will result in housing investments with more foresight (Demsetz, 1969).  The gains and costs of investment decisions in the market largely accrue to the private decision-maker.  Strong incentives stimulate the collection and scrutiny of available information, and efficient decisions based on this information.  In contrast, the institutional environment within which public decision-makers operate often lacks appropriate incentives in this regard (Gwartney and Stroup, 1979).  

     With respect to the demand side, Le Grand and Robinson (1980) argue that inefficiencies arise in housing markets due to imperfect consumer information.  Clearly, the extreme heterogeneity of the housing commodity and the infrequent entry into the market imply that the problem of imperfect information in the housing market is greater than that of any other market. However, the presence of specialists like real estate brokers can substantially solve the problem of imperfect information.  Moreover, the fact that consumers may make decisions with less than perfect information does not automatically imply market failure (Beales et al, 1981).

     Consequently, while consumers must make decisions with imperfect information, it is uncertain what public intervention would improve the market allocation.  Nonmarket models in housing have provided the basis of shortsighted investment decisions (Morton, 1979). Therefore, the substitution of public for private housing producers may neither reduce the risk nor result in efficient supply decisions.      

3). The Instability of the Housing Market.

     The adjustment process in housing markets is longer than those of most other markets (Muth, 1960; Rydell, 1980).  This argument is based upon assumptions that in the short run, the supply of housing services is nearly inelastic and that increases in demand will force the housing price level substantially above its long-run equilibrium level.  Olsen (1976) pointed out that this view of housing market adjustment has theoretical and empirical defects.  He argued as follows: (1) at any time there will be several types of dwellings in the construction process; (2) a rise in price will induce the more rapid completion and supply of these dwellings to the market and greater repair and renovation of existing dwellings; and (3) an increase in demand can often be accommodated by the stock supply via occupation of vacant dwellings.  De Leeuw and Ekanem (1973) noted that even in the short run, the supply  of housing services is directly related to price.

     One argument used as a rationale for housing price controls is that there exists a 'double balance' problem in housing markets.  In other words, the competitive price mechanism cannot balance the housing stock and flow markets simultaneously.  Furthermore, the flow supply of housing fluctuates sharply owing to cobweb instabilities (Stafford, 1978). This view, however, is often criticized by non-market failure theory.  The fluctuations in the flow of housing can be well explained by two factors.  First, the extreme durability of housing capital implies that the flow supply of new housing production will be unstable relative to the flow supply of most other goods.  Durability induces a high ratio of capital stock to the flow of services, increasing the probability of future return.  Thus, a small change in total demand will result in a larger change for new production (Von Furstenburg and Herr, 1975).  Second, the close link between the housing market and the capital market suggests that the cost and availability of financing is a key-determinant of short-run fluctuations.  In other words, the fluctuation of the flow supply of housing, in the short run, depends largely upon the condition of capital market (Jaffee, 1976; Grebler and Burns, 1982).

4). Income Redistribution

   Income redistribution has often been discussed as a rationale for government intervention in housing market (Saffran, 1976; Wagner, 1976; Stafford, 1978; Wolf, 1983).  Income and wealth inequalities and the organization of the housing and mortgage markets may interfere with the ability of poor families to obtain affordable housing relative to their income.  For instance, subsidized housing can be used as a vehicle for transferring income to persons.  Whatever the degree of inequality, the poor will inevitably find it problematic to pay the rent or secure  finance for the housing purchase if available housing for the poor does not exist.  

     In the pursuit of distributional equity, housing policies, particularly focusing on the renters' protection, have adopted rent control, rent rebates, and rent allowances.  There is little evidence that such subsidies have improved distributional equity in housing resources but the nonsupply of new dwellings to low-income groups may arise, owing to legal barriers.  In the United States, for example, local governments typically enforce building codes prohibiting new construction of substandard housing.  Therefore, low-income households are supplied with dwellings that have filtered down to a substandard level (Nesslein, 1983).

     Given increases in effective demand, the housing stock will be upgraded via repair, renovation, and new construction.  Moreover, the supply of housing, particularly low-income housing is price elastic (Rydell, 1980).  Burns and Grebler (1977), and Williamson (1986) noted that a key indirect policy for raising the general housing standard is the promotion of economic growth. Employing an income variable in conjunction with demographic variables, they concluded that the primary determinant of the share of housing investment is gross domestic production.  The United States and the West Germany have improved the housing quality of low-income people responsive to public policies through the private housing market.  In the United States, for example, where public housing constitutes less than 2 percent of all housing, the proportion of substandard housing has fallen at least 80 percent over the postwar period (Nesslein, 1988a).  In spite of serious destruction of housing stocks, Germany, where the market model has been adopted, had succeeded both in eliminating the catastrophic housing shortage and in achieving a high quality of housing standards in the 1970s (McGuire, 1981).

2. Political Rationale for Government Intervention: Objectives of Housing Policy.

     The ultimate goal of housing policy is that everyone should be provided a decent home with a reasonable choice of owning or renting housing he or she wants (Weicher, 1976).  However, in order to fulfil this goal, the degree of government intervention in the housing market depends largely on the political decision-making process of each country.  More specifically, in developing countries, political ideology which each country adheres to is often the most important factors in the government intervention, even if economic rationales are important factors.  

     In capitalist society. where political and economic direction follows democratic and market principles, government intervention might not be necessary if this goal can be achieved by the market mechanism.  Even if the market mechanism cannot achieve this goal, the principle is that degree of intervention should be minimized.  Moreover, many scholars have noted the case of planning or state failure.  Ellman (1978) observed the fundamental problems of the planning model.  First, planning by the central political authority might fail due to the partial ignorance about real situations because decision-makers often distort information, and perfect knowledge of the future is never obtainable under any institutional arrangement.  Second,  the planning model ignores any divergence between the derived plan and the executed plan because it presupposes that the goals of decision-makers and the planning bureaucrats, and those of workers are identical.  Finally, in the absence of a competitive price mechanism, the planning model may not have an appropriate basis for choice to achieve technical efficiency.

     Dieleman et al (1989) concluded that the choice of housing depends largely upon the size of households and their incomes in both the controlled market and uncontrolled market.  Comparing the welfare model with the market model, Nesslien (1988a, b) and Nevitt (1977) concluded that (1) government interventions such as public housing, rent control and general income transfers do not lead to an increase in housing investment; (2) good housing has been affordable to low-income households, not because the cost of housing has been reduced, but because of large-scale housing subsidies or income transfers; and (3) the welfare model has generated significant planning failures.  Toumanoff (1984) noted that market failure is not the result of market itself but the failure of market institutions to promote or inhibit trade to achieve specific allocation of resources.  

     Consequently, the reasons for government intervention in the housing market might not depend upon the housing market failures but upon the political ideology of each country.  For instance, even though Sweden and the United states adopt different housing model, with respect to the provision of housing units, we generally argue that these countries have succeeded in their housing policies even though the affordability problem of low-income households in the United States still remains.  

III. Evaluations of the Korean Housing Policy

1. Discussions of the Korean Housing Market

     Korea, like many other developing countries, has suffered from quantitative and qualitative shortages because of rapid urbanization along with explosive population growth.  However, housing problems of Korea seem to have different characteristics from those of other developing countries due to unique Korean experiences.  

     First, the post-Korean war period has seen a more than twenty-fold increase in gross domestic production (GDP) per capita from a level of less than $ 100 in 1960 to over $ 2000 in 1986.  The Korean Economic Planning Board (EPB, 1990) estimates that, in 1989, 73 percent of the population resided in urban areas compared with only 38 percent in 1968.  On the other hand,

the ratio of housing units to households has declined over the past two decades from 83 percent in 1968 to 72 percent, particularly, 54 percent in the five biggest urban areas in 1989 (The Korean National Housing Corporation, 1989).  Mainly to increase economic growth, the korean government has kept low-priority on housing investment (1.5 percent of GNP), comparing with other developed countries (6 percent of GNP) (Renaud, 1989).

     Second, the Korean government has governed the housing market along with other markets (Amsden, 1989; Wade, 1990) via price control on new housing stock and a strong zoning system even though Korea has maintained a housing market model like the United States.  The most interesting thing in Korean housing is that only 11 percent of total housing stock is public housing even though 61.8 percent of total housing stock has been built by public sectors such as local government and KNHC.  Moreover, most public housing has been occupied by the military and bureaucrats.  The public sector has built private housing for sale like private firms, even if the scale of public sector housing construction is generally smaller than that of private firms.  As a result, the role of the public sector is similar to that of private sector, even though the public sector has rights of eminent domain and decides the housing price.  Ownership types in urban areas are composed of owners (54 percent), Chonsei tenants (34 percent) and monthly renters (12 percent) (Bak, 1990).  Furthermore, 75 percent of total housing stock is occupied by multi-families.  This means that most below-middle income people reside in rental housing like chonsei or monthly payment rooms (KNHC, 1988).    

     Third, the Korean financial system for housing is very weak, similar to other developing countries.  Even though mortgage funds have increased substantially in recent years, there is relatively little mortgage capital available compared to the situation in developed countries.  This underdeveloped housing finance system has helped spawn a unique form of tenure called chonsei. and a high proportion (73.91 percent) of total renters are chonsei (KNHC, 1988; Gyourko and Kim, 1989).

     The most important problems in Korean housing policy do not exist in the housing construction by the public sector but in the sale of their housing, and in the mismatch between the goal of housing policy and the demand for housing services.  Moreover, along with the unique characteristics of Korean housing, the housing policy with its provision for housing ownership has caused several housing problems such as housing market segregation between owners and renters, the deterioration of income distribution, and a limit to the increase of the housing stock.    

2. Evaluations of the Korean Housing Policy

1). Evaluations of Economic Areas

(1) Externality and Market Imperfection

   Sources of market failure provide the rationales for government intervention.  Under certain highly restrictive conditions such as perfect information and perfect execution of the decision of the political authorities, non-market models may result in efficient resource allocation (Wolf, 1983).  

  With respect to externality and market imperfection in Korean housing market, there are at least no externalities in low-quality housing areas (Kim, 1989).  Slums almost have not existed in urban areas, even if 20 percent of total people in Seoul resides in squatter areas (KNHC, 1989).  There almost are not studies about the existence of externalities in these areas.  In contradict, these areas have provided the poor people with the best dwelling space, considering their incomes and the instability of their jobs.  Kim (1990) argues that: "There is not even one centimeter error in the use of dwelling space in squatter areas, because people who reside there use their dwelling spaces most efficiently under the constraints of a scarce resource" (p. 461).  

(2) Distorted Income Distribution and Market Instability

   Housing occupies a high proportion of the total income of the urban poor, particularly in developing countries (McCallum and Benjamin, 1985).  The ratios of housing investment to monthly income in Seoul are respectively 37.9 percent (owner), 41.9 percent (chonsei) and 33.4 percent (monthly renter) in 1989 (KNHC,  1989).  Therefore, a change in their housing situation such as housing price and neighborhood change, highly affects their total incomes.  The Korean government has governed the housing market through strong land use regulation and price control of the new housing units.  However, these policies have caused serious problems such as distorted income distribution and inefficient land use.  

     Distorted income distribution in the Korean housing market arises in two different market processes, which include land use change and housing sale.  First, the government regulates land use and land transaction in urban areas.  It can change land use, and people have to get a permit from the government in order to buy or sell the land.  This process strongly interrupts the market process and causes to several negative effects: i) when the zoning, for instance, changes from green area to dwelling or commercial area, the land price dramatically increases from two to twenty eight times, even though the level of increase differs from place to place (KNHC, 1989), and ii) because of the strict regulation by the unitary government, false information is often diffused.  This results in inefficient land use and close collusion between bureaucrats and owners who have prior information on the land use change .  

     Second, with respect to housing sale by the public sector, two serious problems are dramatic price increase and speculation. i) Housing prices have increased 31.9 percent per year while the commodity price index grew by 10.8 percent (Renaud, 1989).  ii) If somebody has correct information on land use change or if she or he buys new housing, they can get a lot of benefit due to the price gap by land use change, or between the controlled price of new housing and the market price (in case of land, two to twenty eight times' benefits, and in case of housing, 20 percent to two times' benefits).  This phenomenon often results in serious speculation on land and new housing by people who do not need housing services.  Furthermore, because of the strong regulations on building codes and zoning, it is very difficult for small firms or individuals to participate in the housing construction market, even though participation in these processes can bring great benefits.  Therefore, the housing and land speculation in Korea might be a natural consequence which can be generated by planning failures due to the strong government intervention.

2) Evaluations of Political Areas

(1) The Mismatch between the Goal of Housing Policy and Housing.

   Housing planners often forget the relationship between housing and the economic and social well-being of housing demanders (Chislett, 1987).  Economic mismatch occurs due to the gap between the housing price and the economic ability of the household.  The Korean housing policy has made an attempt to provide each household with owned housing which is not shared by other households (Lim, G. et al, 1980).  This policy might be seen as the ultimate goal of housing policy, and most of developed countries have tried to achieved this goal.  At first glance, this goal looks most desirable.  However, if we consider the political and economic situations of Korea described, and the natural deterioration and demolition by other project like road construction, we can find that this goal cannot be easily achieved, and it can lead to a mismatch between housing supply and demand.    

     Furthermore, serious problems arise in the construction and sale of private ownership housing by the public sectors.  The housing price,  compared with the incomes of households in the below middle-income group, is very high, and housing finance system also is very weak.  These housing units might not be affordable to the original objective groups.  In other words, they do not have the economic ability to buy the new housing that is provided by the government.  Therefore, this policy does not result in the provision of shelter for the effective demanders, but in the provision of housing assets that are used as a means of wealth accumulation by high or above middle-income people who already have their own housing (Kim, 1991).  

(2) Political and Operational Feasibility

   Anyone who reviews government housing programs often concludes that they have produced a field of unintended and undesirable consequences (Heady, 1978).  Any policy program has to be politically and operationally feasible.  In order to solve these problems, one must understand problems in policy implementation as well as policy formulation.  In making policy programs, politicians seek to build up or at least maintain their level of political support.  

     The Korean housing policy by the unitary government might be the most politically feasible.  The Korean government has strongly intervened in the housing market through the price control of new housing and the regulation of available land for new construction.  The Korean National Housing Construction (KNHC) and National Land Corporation (NLC) have created many job opportunities for the retired military and bureaucrats.  These corporations might be supportive to the interests of bureaucrats.  The civilians, who do not have their own housing, also prefer this policy because the price of new housing, which is built by the KNHC, is relatively lower than that built by the private sector, given the lack of public housing and mortgage system.

     With respect to operational feasibility, this policy has, however, created several problems.  First, it has led to the distortion of market process because the government strongly controls the price of new housing irrespective of the market price of existing housing.  The distorted market process results in housing and land speculation.  As a result, this policy does not provide non-ownership groups with housing services. Instead, it has often been used by high-income groups as a way of increasing wealth.  Second, the strong land use regulation through eminent domain often interrupts the property rights of land owners and deprives economic activity base of people who participate in informal sectors such as face-to-face economic activity and hawkers.  Third, strict conditions for the participation in the housing construction market results in the depreciation of small construction firms and the monopoly of big companies (Chaebol) in housing construction.  It also results in the cohesion between Chaebols and politicians and brings in corruption of bureaucrats.  

3). Summary of Evaluations

  Jung (1991) and Gang et al (1990)  argue that the Korean housing policy has been wrong from the starting point.  Kum (1990) argues that the sale market of new housing is an unfair gambling game that is led by the government.  High-income people get more benefit, whereas low-income people have been exempted from the benefit of housing policy.  If somebody buys the new housing, they can get a lot of benefit due to the gap between the controlled price and its market price.  Therefore, housing and land speculation in Korea might be a natural outcome due to the strong and distorted intervention by the unitary government.  

     As a result, the Korean housing policy in practice has focused on the above middle-income people, irrespective of the stated goal.  It has interrupted the participation of below-middle income people in the housing market without improving housing affordability for renters.  

VI. Conclusion

   This paper reviewed the rationales for government intervention in the housing market and evaluated the Korean housing policy, where the public sector provides the people with privately owned housing.  This policy has caused several problems, such as the mismatch between housing supply and demand, price fluctuation, and speculation and distorted income distribution.  In other words, government intervention, which has attempted to remedy market failure in housing, has resulted in state or planning failure, and sometimes deteriorates market failure due to the mismatch between the executed result and the goal of housing policy, and the lack of political and operational feasibility (Vliet, W and W, J., 1990).  

     However, it has not generated only negative effects.  It has also made significant contributions such as improving construction techniques, providing job opportunities, and inducing economic growth, especially in the early stages of national economic development.  This paper does not deny totally the necessity of government intervention in the housing market while it argues that the degree of government intervention should be limited to correction of the market failure in housing.  It only tries to suggest a way of government intervention that can increase its effect, and to match the original objectives of government intervention with their results.

     Consequently, this paper suggests that the Korean housing policy should focus on the provision of housing service such as Chonsei housing and monthly rental housing for renters instead of providing housing assests for the above middle-income people, whereas private ownership housing should be provided by the private sector, depending upon the market mechanism.  Government intervention in private ownership housing market should be minimized.  More specifically, this paper suggests an alternative, which is the provision of chonsei housing which has only the value of housing services.  Considering the political and economic situation such as the fact that 73 percent of total renters lives in chonsei housing, the mortgage system is very weak, and that a land saving system is available, this alternative can contribute to the resolution of Korean housing problems.  First, it can provide housing services at a lower price, compared with the price of new housing by public sector, and increase the housing affordability of below middle-income people.  Second, it can contribute to the encouragement of a private ownership housing market because it gives benefit incentives to private firms due to the noncontrol of new housing price.  Third, it can mediate the dramatic increase of housing price and price fluctuation because the price of chonsei is lower than the market price and it covers the real construction cost of housing.

  Finally, this policy might have political and operational feasibility because i) there are many demands for chonsei housing; ii) chonsei covers the real construction cost of housing; iii) the public ownership of Chonsei housing might be possible because the land saving system already socializes available land for the future development.  This policy would also generate some problems, such as maintenance and management of chonsei housing. The socialization or public ownership of housing ownership can interrupt the property rights of individuals.