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[VIEWPOINT]Prepare now to cushion a burst bubble

Despite the government’s hard-line stabilization measures, domestic real estate prices have been steadily rising, centering on particular areas.
Accordingly, an increasing number of people are worried that our country may follow Japan’s experience of having its real estate bubble bursting in the 1990s.
Japan’s real estate prices soared continuously for nine years, from 1983 to 1991, beginning in downtown Tokyo and spreading over the entire capital, to other big cities and local areas. Based on the myth that “land prices never drop,” the average price of land in the six largest cities rose sharply more than three times in the late 1980s. Japan’s total value of irreproducible fixed assets, including land, in late 1987 was 1,720 trillion yen ($15.3 trillion), which was four times greater than 406 trillion yen, the total land price that same year in the United States, which is 25 times the size of Japan.
But since the Japanese government took all-out measures to stabilize the real estate market in the late 1990s, real estate that had been purchased by speculators poured back into the market for sale, and in the long run, real estate prices went down. When the market began to show a surplus supply, land prices continued to fall sharply. The net effect on the Japanese economy was long-term stagnation, in which both the real estate and financial sectors fell into a recession at the same time.
Japan’s case clearly showed that a real estate bubble does not last forever. After going through stagnation, sooner or later accompanied by extremely slow transactions, the real estate bubble in our country too is highly likely to pop. In other words, if a low-growth trend continues for a long time, it is possible we’d face the collapse of our own myth that real estate prices never drop, although they have seemed so solid.
Even if the scale and degree of the bubble may be smaller than Japan’s, the collapse of the real estate bubble may bring more harmful effects than we expected. Unlike Japan, our country’s bubble is wrapped around apartment houses and condominiums, caused by a surplus demand in particular housing markets. The main actors in the bubble formation are households. The problem is that the financial structure of households today is more vulnerable than before the foreign exchange crisis of 1997.
In a situation where the proportion of real assets is unusually large and the proportion of financial debt continues to increase, a plunge in real estate prices would cause households to solve their debt problems by cutting down on spending. They might have to sell their financial assets in haste. Our concern is that a sudden collapse in the value of household assets is highly likely to result in “stagnation starting from households.”
To minimize the possibility of such a stagnation and its ill effects, government authorities should apply policies carefully. First of all, the government should induce a soft landing for the real estate market while preventing additional increases in real estate prices. To prevent speculative demand in particular areas and to stabilize real estate prices, tax policies alone are not enough. The government should subdue the real estate bubble slowly by adopting a proper interest rate policy along with a tax policy. Also, by refraining from formulating unreasonable regional development policies, it should control sharp hikes in land prices, which are at the root of high housing prices.
Second, the government needs to pursue a more resilient future housing supply policy in accord with the domestic economic situation. Along with the slowdown in the rate of population growth, the growth in households ― which reflects the actual demand for housing ― has already dropped rapidly since 2000. Watching the trend of changes in households, from nuclear families and an aging population, the government should focus on the supply of small and medium-sized housing in the mid- to long-term, together with a short-term expansion of supply.
Now is the time to consider changing policy, from a quantitative housing supply policy to a policy that can improve the “quality of life” of housing consumers.
To prepare for a situation in which the financial state of the middle and low-income brackets becomes extremely vulnerable in case the real estate economy has a hard landing, the weakened financial system for ordinary people should be restored promptly. To prepare for an increase in filings for individual bankruptcies in the middle and lower classes, the government needs to establish a social safety net while minimizing the moral hazard. Among others, households should be made aware of the danger of a collapse of the real estate bubble and helped to improve their finances to minimize the possible shock from the burst.

* The writer is a researcher at the Hyundai Economic Research Institute. Translation by the JoongAng Daily staff.

by Park Duck-bae