KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Research Monograph KOR Korean Unique Regulations in Housing Market

We study regulations in the housing market, which are very unique and have great influences in Korea. Due to COVID-19, the housing market have experienced rapid changes. Thus, the government responded boldly with unprecedented policies. Among others, 3 special regulations are on the table for discussion. The first is the Land Transaction Permit, which was implemented to reduce demand on housing in specific regions. Second, the Price Cap on New Houses is investigated for housing supply policy. The final is a regulation on the contract renewal claims in the housing rental market.

Chapter 2 analyzes the direct and indirect price effects of the Land Transaction Permit (LTP), a selective regulation introduced in 2020 for high-priced houses in Seoul to stabilize skyrocketing prices. The LTP is an administrative regulation that requires local governments to permit transactions in designated "areas," and as of 2022, the total area covered by the LTP is about 9% of Seoul's land area.Houses in the LTP zone can only be purchased by buyers who are either homeless or will eventually become single-family homeowners, and they must actually live in the houses for two years immediately after purchase. In this study, we analyzed the price and transaction volume of LTP regulated and unregulated houses, focusing on "Jamsil-dong, Samsung-dong, Daechi-dong, and Cheongdam-dong," which were designated in June 2020. In the regulated area, the LTP scheme directly reduced transaction volumes by 38.3% and prices by 4.3% compared to unregulated areas. However, the LTP scheme unexpectedly had a positive price appreciation effect on homes located closer to the regulated areas. When unregulated dwellings are categorized according to their distance from the regulated area, we estimate that dwellings closer to the regulated area increased in price by 2.3% relative to dwellings further away, and this effect is larger the closer they are to the regulated area. It appears that some of the demand in the regulated area shifts to nearby unregulated areas with higher substitutability. The different direction of the direct effect on regulated areas and the indirect effect on nearby areas suggests that selective regulation, such as LTP, may not be the right regulatory approach to achieve the goal of stabilizing the housing market.

The next chapter, Chapter 3, examines the effects of the Price Cap on New Houses. This price cap, which limits the price of new homes, is one of the controversial regulations that raises concerns that it may limit housing supply in the future. However, this study's analysis found no evidence that the price cap reduces the supply of new homes. Although the pre-sale price cap limits the profits of housing construction projects, it is operated by reflecting all the costs of land and construction for housing supply. Even if the prices of newly supplied homes are limited by the price cap during the period when the housing price is on the rise, the sales of new homes is likely to increase as well. Thereby housing development projects are profitable enough to cover all the costs. Therefore, there appears to be no empirical evidence for concerns that future housing supply will be reduced by this price cap implemented during the housing market boom. However, these results are contradictory to the results of existing studies, so caution needs to be taken when interpreting them further.

Chapter 4 investigates the price impact of the deposit control imposed on the housing repo contract in Korea, known as Jeonse. Jeonse is a unique housing repo contract in Korea where the landlord borrows a deposit from the tenant, using the house as collateral. The tenant is granted the right to occupy the house during the contract period at the expense of the deposit’s opportunity cost. In July 2020, the Korean legislature passed a law granting tenants the right to renew the Jeonse contract once, with the new deposit amount not exceeding a 5% increase from the original amount. While this new regulation has been heavily criticized as the primary driver of the surge in Jeonse deposits during the pandemic, its actual price impact has not been properly estimated.

We estimate the value of the Jeonse renewal option monthly using option pricing techniques, based on reasonable assumptions about the housing price process and information gathered from the current term structure of interest rates. Our estimation results indicate that the deposit control regulation raised Jeonse deposits nationwide by only 0.97% and by 4.80% in Seoul at the time of the introduction of the regulation, a magnitude significantly lower than previously discussed in both media and academic circles. Furthermore, we demonstrate that the renewal option does not have any intrinsic value over the past 10 years, suggesting that the option can be considered pure insurance against an unexpected increase in the equilibrium level of Jeonse deposits by the time of expiry. Based on the background of the regulation and the results of our analysis, we provide policy suggestions.

Summary

Policy Study KOR Land Investment and Its Impact on Corporate Performance

This study builds upon the 2019 research, The Macroeconomic Implications of Land Purchases: A Study on the Net Purchase of Land by Corporations, by focusing on the accumulation of land assets by manufacturing firms. Utilizing microdata from the Mining and Manufacturing Survey, it examines the ratio of land assets to tangible assets and observes a pronounced increase in land assets among these firms. The study conducts a regression analysis to compare the performance of firms that invested in land with those that did not, covering a two-year period before and after the investment. Firms that invested in land showed a significantly higher rate of value-added growth compared to their counterparts, though this gap in growth rates diminished after the investment. In particular, the year of land investment coincided with considerably new investments in buildings and machinery, as well as an increase in employment.

In light of these results, the study confirms the role of land as a productive resource. Firstly, land investment exhibits substantial complementarity with other capital goods, evidenced by increased investments in buildings and machinery during land investment periods. Secondly, similar to machinery investment, firms often expand their capital stock in response to positive productivity or demand shocks. However, land investment tends to be more strategically aligned with expanding the firm's scale, which is reflected in the simultaneous increases in employment and value-added, leading to a reduction in labor productivity during periods of land investment.

While land investment is mainly observed in small and medium-sized enterprises and has increased since the 2000s, this study does not provide specific reasons for this trend. The causes of land investment, presumably linked to Korea's unique institutional, regulatory, and economic changes, call for further detailed research.

Summary

Research Monograph KOR Policy Strategies for Sustainable Regional Development

Rapid aging and low birth rates have sparked concerns over population extinction in some provinces, and fundamental questions have been raised over the sustainability of basic local governments and effectiveness of regional development systems. In particular, amid the swift progress in digital and new technologies, the accelerating pace of low growth has precipitated the need to enhance regional industrial competitiveness and build innovative growth engines more than ever before. Therefore, the research in this paper was conducted with the following in mind: ① determinants of the transfer of industries or companies; ② effects of the transfer of public regional development institutions; ③ differential factors of regional industrial diversification and innovation systems; ④ sustainability of local government finances; ⑤ measures to resolve the inconsistency between the administration and daily life, and strengthening the connectivity between cities and their surroundings; ⑥ housing policy measures for regional development.

Regional development policies must consider both fiscal efficiency and economic growth at the national level, and connect and cooperate with the central and local governments to narrow regional gaps and bolster uniqueness while enhancing the effectiveness of policies. This highlights a crucial point in Korea's regional development policy. Indeed, when the issues of low growth, aging, and regional gaps facing Korean society and economy are considered, an examination of the sustainability of regional development must first be conducted followed by a guarantee of sustainable growth in which finances are managed.

Accordingly, this study first identifies a strategy for industrial diversification that is effective for regional economic growth, and provides implications by dividing the local environment into the dimensions of industrial diversity and innovation capability. It is found that the diversity of industries can have a positive effect on regional development but the economic impact can vary according to industry. As such, the industrial characteristics and conditions of a region should be considered. Secondly, it is also shown that while the relocation of a company can positively effect employment and investment in the short-term, it can diminish its soundness and profitability in the long-term, and the possibility of survival and growth decreases; which has negative repercussions for regional development. Thirdly, the relocation of public institutions is found to have boosted employment in local manufacturing and services which relates to the improvement of settlement conditions. However, no significant effects were observed in the employment in knowledge-based industries suggesting that the main industry must be nurtured for the region to continue growing. Fourthly, an examination of the financial conditions of local governments confirms that, with the exception of Seoul, unsustainable fiscal operations were implemented in 2013-2018. Fifthly, a direction for the reorganization of administrative districts is suggested as metropolitanization could accelerate the decline of non-capital cities. Besides the linkage between administrative districts, it is also recommended that areas with declining populations identify the living area system and strengthen their connections with neighboring areas. And lastly, a direction for housing policy is also presented since an inflow into and concentration of the metropolitan area can exacerbate the polarization of asset prices and income by region. In particular, this paper proposes a shift from the jeonse-centered lease policy to a guaranteed monthly rent and in the policy direction to respond to the increase in vacant homes in the non-metropolitan area.

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