[Labor Column] The Real Estate Market and the Paradox of Regulation

In February 2020, the Berlin House of Representatives introduced a rent cap. It was designed to curb soaring rents in Berlin and protect the housing rights of ordinary residents. The measure froze the rents of about 1.5 million households in Berlin at the level of June 18, 2019, for five years. It also allowed annual increases of up to 1.3% from 2022, in line with inflation. The law also included forced rent reductions for rents more than 20% above nearby market rates.
In Berlin's rental market, landlords pulled properties off the market, and the supply of newly rented housing fell by half. A balloon effect also emerged, with rents in nearby Potsdam and other areas surging by more than 10%. Double contracts became widespread, with one agreement listing only the legal cap and another promising to pay the difference if the law were ruled unconstitutional. That only deepened tenants' anxiety. In April 2021, the Federal Constitutional Court of Germany ruled the law "invalid." The court said rent-control legislation falls under the federal government's exclusive authority, not that of state governments. The fallout was severe. Because the law was treated as if it had never taken effect, tenants were suddenly burdened with paying back the rent difference in a lump sum. A policy meant to protect ordinary people's housing rights ended up hurting them instead.
This is a phenomenon known by many names: the paradox of good intentions, the paradox of regulation, or the market backlash. Throughout history, there have been many cases in which systems introduced with good intentions, such as protecting the socially vulnerable, produced adverse results for the very people they were meant to help. Examples include Maximilien Robespierre's milk during the French Revolution, the cobra effect in colonial India, and Mao Zedong's sparrow campaign in China, which led to disaster through excessive environmental intervention. South Korea is no exception. Examples include the Non-Regular Workers Protection Act, which worsened the quality of non-regular employment; the Professor Act, which triggered mass layoffs of lecturers; and the sharp increase in the minimum wage, which reduced the number of simple labor jobs. These cases show that policies that ignore economic incentives can become a "boomerang," harming the vulnerable in ways opposite to their original intent.
The clearest example is the real estate policies of successive administrations. Preventing speculation, stabilizing home prices, and protecting ordinary people's housing rights are goals that every government, conservative or progressive, would share. The problem is that the more aggressively governments pursued regulation-centered policies, the further they moved from those goals. The Moon Jae-in administration announced 26 sets of measures and implemented tough regulatory policies. It expanded Areas Subject to Adjustment, imposed heavier capital gains taxes on multi-homeowners, tightened lending rules, and introduced the Three Lease Laws. Yet those steps led to a surge in home prices in Seoul and other parts of the Seoul metropolitan area, as well as a rental crisis.
Since taking office, the Lee Jae-myung administration has rolled out a series of real estate measures centered on strong demand suppression, including tighter lending rules, expanded regulated zones, and stricter residency requirements. Soon after launch, the June 27 Real Estate Measures capped mortgage loans at 600 million won and completely banned loans for multi-homeowners. The Oct. 15 housing measures also designated all of Seoul and 12 areas in Gyeonggi Province as Areas Subject to Adjustment, Speculative Overheating Districts, and land transaction permit zones. The administration is also discussing reducing the Long-Term Holding Special Deduction for single-homeowners who do not live in the property. In short, it is showing a high-intensity regulatory approach that mobilizes every available tool, from finance and taxation to regional designations.
In particular, attention in the real estate market had long centered on May 9. Through a notice that the grace period for heavier capital gains taxes on multi-homeowners would end on that date, the government had been pressuring them to sell. Now that the deadline has passed, attention has shifted to how the market will move next. Views are divided. The government says listings have increased in the three Gangnam districts and Yongsan, and that home prices are beginning to stabilize and decline. Others, however, expect a freeze in listings and a collapse in transactions. Some also predict that prices in other parts of Seoul, excluding the three Gangnam districts, will rebound. There are also concerns that rental supply will dry up, rents will soar, and housing insecurity will worsen for ordinary people without homes.
Given the strong lending restrictions and heavier taxes, a sharp surge in home prices does not seem likely for now. But is stabilizing home prices really the only measure of success in housing policy? Policies that make it easier for ordinary people to buy homes, ensure that the jeonse and monthly rent markets function smoothly, reduce housing costs for renters, and address real estate conditions outside Seoul are also important. It is difficult to predict how the market will move after May 9. Still, history offers one clear lesson: regulation-heavy policies have never succeeded, regardless of their form. The same is especially true in real estate, where the paradox of regulation tends to work most sharply.
dinoh7869@fnnews.com Reporter