Interest rates at unprecedentedly low levels are changing South Korean lifestyles. Long-term bank saving rates yield no more than 1 percent per annum. Factoring in inflation, returns have long been at zero or worse. A retiree who puts 300 million won ($272,800) in severance pay in a savings account at 1.9 percent gets about 400,000 won a month after taxes.
The stock market has been lethargic for years because of the protracted slowdown. Products that offer higher yields are snatched up. Samsung SDS’s recent initial public offering attracted 1.5 trillion won in bids, the largest in four years. It drew an eager response, even though 500 million won buys only 10 shares in the Samsung Group affiliate.
Private pension products have offered hardly no returns for years. Yet investment ceilings and options are limited as they fall under regulations and guidelines developed when interest rates were high. As a result, short-term floating funds reached a record of 757 trillion won as of the end of August. Government policy lags behind our fast-changing times. The most dramatic change is in real estate, where ultra-low interest rates killed the once prevalent two-year-contract rent market.
Landlords are shifting to monthly rents because they are more profitable that yields on lump-sum rent deposits. Monthly contracts are 41.6 percent of the rental market, up from 32.9 percent in 2011. Yet government housing policies, financial support and tax incentives focus on long-term rents. The rent crisis cannot be solved just by lowering mortgage rates.
To the government’s credit, the Oct. 30 real estate stimulus focused more on monthly rents. Supply and demand for monthly rent is no longer restricted to low-income classes. Many larger apartments in rich neighborhoods in Gangnam District, southern Seoul, are also offered on a monthly basis. Housing policy must be dramatically realigned.
The United States and Germany provide tax benefits and other assistance to landlords because they see the lease business as a supplier of public housing. We, too, must promote more home rental businesses. When rents are offered by business franchises, the market could be more transparent and conflicts between landlords and tenants could be eased. Taxes also could be collected more easily. There is little that individuals or groups can do about ultra-low interest rates. Authorities must come up with policies to address the paradigm changes in the market. They must not neglect retirees who live without hope and scrape on by with their life savings.
JoongAng Ilbo, Nov. 14, Page 34