On November 6, the government announced the areas subject to an upper limit in initial housing prices sold by private companies. They were 27 dongs including 22 dongs in 4 districts in Gangnam and five dongs in Mapo-gu, Yongsan-gu, Seongdong-gu, and Yeongdeungpo-gu. It was the so-called "pinpointing of dongs." It is significant that the government restored the cap on initial housing prices for homes built by private companies, four years and seven months after the policy was abolished. High initial prices drive apartment prices up, and this in turn leads to higher initial prices. The latest measure shows that the government will not just sit still and allow this to continue. The cap on initial housing prices first appeared in 1977. It was repeatedly implemented, abolished and reintroduced, until it was basically banned from houses sold by private companies in April 2015. The result was devastating. According to an analysis by the Citizens' Coalition for Economic Justice, nationwide initial housing prices jumped on average 8% every year since the policy was abolished until July 2019. The rate of increase was six times faster than the inflation rate and four times faster than the rate at which household income increased. Apartment prices also climbed. Prices soared by more than 32% in Seoul and 10% nationwide. Some apartment compounds saw prices more than double. The latest action by the government shows its determination to end this vicious cycle.

The cap on initial housing prices restricts housing prices to remain within the total of the land price, construction cost, and an adequate profit, when the company first sells the house. Resale of the house is prohibited for a certain period of time and owners are obligated to live in the houses they purchase. Thus it is definitely effective in stabilizing housing prices. For example, from 2008 until the end of 2014 when this policy was implemented, the price of apartments in Seoul dropped by 2.8%, and those in the four districts in Gangnam dropped by 4-11%. Despite the huge effect of this policy, the government opted to pinpoint locations subject to the policy rather than implement it throughout the city. The government explained that they considered "the inflation rate of housing prices, concerns of setting high initial housing prices, and market influence," but it raises questions on whether the latest measure will contribute to stabilizing housing prices.

It is likely for us to immediately witness high initial prices being set in areas adjacent the 27 dongs subject to the price cap. It's the "balloon effect." There is also the issue of equity. According to legal requirements, the cap should be applied to Gwacheon, Gyeonggi-do as well as the 25 districts in Seoul. But the government did not do that. The bigger concern is that the government is sending the wrong message to the market. The Moon Jae-in government has already withdrawn from the housing price cap twice. It limited the requirements for the price cap to speculation-prone zones, then last month, excluded reconstruction and redevelopment areas that had either applied for or received the approval for the management and disposal plan. It retreated again with the latest pinpointing of areas subject to the price cap.

The successive retreat of government policies seems to have taken into account the difficult economic conditions. But if the government simply "pretends" to take action, market participants will misunderstand it and think, "The government is trying to use real estate as a means to stimulate the economy." When it comes to real estate, once the market begins to jump, speculative demand joins in and the market tends to bubble beyond control. The damage then goes to the people, especially those in less favorable economic conditions. When it comes to correcting a wrong policy, the sooner the better.