House prices in Seoul are among the highest in the world. A three-bedroom flat in a high-rise apartment in the posh Gangnam area easily exceeds US$500,000, while a five-bedroom condominium in glitzy Tower Palace will set you back US$2 million. In the past decade, prices have nearly tripled.
According to a report by a private think-tank, apartment prices are about 60 per cent of those in Manhattan. But US per capita income is three times that of South Korea, meaning that, in real terms, prices are about twice that of Manhattan, it says.
It is against this backdrop that civic groups and reformist members of the governing Uri Party have demanded that builders disclose their costs. Initial prices set by builders have nearly doubled in five years, while inflation remains much lower. Civic groups believe builders are reaping huge profits by forming a kind of price cartel. Without forcing them to reveal the cost structure, they argue, prices will go through the roof.
In fact, rising property prices in and around Seoul are becoming an acute social problem. This is because prices in provincial areas have remained flat, widening the wealth gap between people in the capital and elsewhere. As a result, the campaign to require builders to disclose their costs is widely supported throughout the regions.
Builders argue that to do so would go against basic market principles. They also say that it would discourage new projects, eventually pushing up prices even further.
The administration backs these claims, and has settled on a compromise. Therefore, only builders of small projects will have to reveal their major cost elements, but not the entire pricing structure.
Given the growing concern that the economy is moving towards socialism under the new progressive government, such a compromise might seem inevitable. A radical approach to changing business practices might cause more trouble, further discouraging businesspeople who are already critical of the administration.
But there is no doubt that this absurd apartment price structure needs a radical overhaul to make it more reasonable and market-oriented. For one thing, the system does not appear terribly capitalist. Buyers have to pay up front for their apartments, for example, even before the site has been levelled. That seems unfair, as people do not even know exactly what kind of home they will end up with. Many people are calling for a system where consumers pay for their apartments when they are completed. But the builders have refused to entertain such a scheme. Market rules can be applied only when both buyers and sellers stick to the rules.