[VIEWPOINT]High-Rising Real Estate: Bad for HealthA serious long-term imbalance between several economic factors is at the root of the current economic crisis in Korea. They can be summarized as the distortion of pricing structures and the imbalance between assets and income.
Some time ago, wages, interest rates, rent and foreign exchange rates － the most important prices in an economy － reached a level which was untenable. What a company paid out in wages, interest and rent was much higher than the added value which the company created through its production. As a result, companies' losses accumulated, leading eventually to huge insolvencies.
Restructuring changes forced by the economic crisis have much improved this imbalance. Though real wages and rent require further adjustment, foreign exchange and interest rates have been radically altered. The imbalance between income and assets has also steadily improved. But things are not yet good enough.
As of 1991, the total market value of all the land in Korea was more than nine times the annual national income. Entering the 1990s, land values stabilized. The ratio of the land value to national income dropped to 5.4 in 1995 and now hovers around three or four. Though the ratio has been steadily dropping, it is still higher than in most other industrialized countries, where the land value is about equal to national income.
In Japan, notorious for its high real-estate prices, the total land price was over four times national income as of 1991. The Japanese economy proved incapable of sustaining that burden. Land prices have dropped dramatically over the last 10 years: residential property by 50-60 percent and commercial property by about 70 percent.
People in other industrialized countries usually buy homes with a mortgage loan. The price of the house is around three to four times their annual income. If the ratio is beyond that level, the burden of repayment is too great and banks are reluctant to loan.
According to recent research, in this country, home prices are more than eight times the average annual income.
What does having high real-estate prices mean? In the general economic overview, rising real-estate prices signal a transfer of wealth between classes and generations; there is a movement of wealth from the people without real estate to those who own it.
In Korea, the rise of real-estate prices has contributed to making life for the elderly more stable － their property is worth more and better counters rising inflation. However, for those of the younger generation, starting a new life without the benefit of real estate, the price rise is a heavy burden. That is also true for companies.
For a stable society, young people about to start families need affordable shelter － it is a basic necessity. In this country, where the price of land and interest rates are high, the cost of housing for the young is so high that it has forced wages up. Companies are unable to maintain their competitiveness.
Because of those factors, the continuing upward surge of the real-estate market is cause for serious concern. If prices keep rising, the goals of our economic restructuring become more distant.
The level of wages in Korea is still too high compared with rival nations. This is particularly true of those entering the work force for the first time. That is an inevitable result of high real-estate prices. But it is damaging, for it reins in corporate competitiveness and restructuring.
Recent policy to lower interest rates to check additional corporate insolvencies and spread losses around are inevitable requirements. But, as investors' earnings on their savings drops, and they look to real estate to make money on their capital, their actions have the unwelcome extra effect of further stimulating real-estate investments. It would therefore be unwise for the government to stir up the real-estate market through deregulation and by adjusting the taxation system.
The instant cure for economic woes is to boost the construction and real-estate markets, and the government may find it difficult to resist this seeming panacea.
But in the long-term, using stimulus to the real-estate market as a measure to revive a spluttering economy is a serious health risk for all of us.
The writer is a professor of economics at Sogang University.
by Cho Yoon-je