How I misjudged the market
The author, the head of the Economic Research Institute for the JoongAng Ilbo, is an editorial writer.
Three years ago, I wrote a column on the housing market. At the time, the conservative Park Geun-hye administration took measures to encourage home purchases through cheap and easy loans. I advised our readers against buying a home, including in Seoul. I based my argument on four factors — interest rates, income level, demographic factors and demand and supply. My prediction was completely wrong. Let’s look back and work out why I missed the mark so dramatically.
First, I assumed that Korea’s interest rates would increase in tune with the rises in the United States. That didn’t happen. The U.S. policy rate is higher than the Korean counterpart. The Bank of Korea is still keeping its benchmark rate at 1.5 percent — unchanged from the first 0.25 percent hike from a record low of 1.25 percent five years ago. The loan rate has gone up, but bank deposits still pay a trifling yield. Floating liquidity swarms in search of decent-paying investments.
Second, I thought at the time that the residential property value against income — with apartment prices 10 times the average income — had reached its peak. Even in developed economies, a ratio over 10 times is rare. But our deepening income disparities have contributed to boosting home prices.
Under the Moon Jae-in administration — and with our per capita income reaching $30,000 — the income gap has widened. As of the end of June, the income of the top 20 percent has gained as much as 10.3 percent against a year ago, whereas that of the bottom 20-percent has decreased by 7.6 percent.
The rich are still hungry to own more houses in the posh neighborhoods of southern Seoul or in high rises with views of the Han River. Due to plunging prices in the countryside and the government’s regulation on multiple property owners, the wealthy living outside Seoul have joined the shopping spree for a decent home investment in the capital. The heat always invites speculative forces and for-profit rental businesses.
Properties in bustling cities are in hot demand around the world. The fourth industrial revolution has brought about a renaissance of urban areas that would benefit most from connectivity and various future-related services. Consumer life will flourish in the urban clusters of talent, information, culture, education and traffic infrastructure.
Third, I had bet that demographic changes from baby boomers retiring would affect the housing market. Seoul again proved to be an exception. Rich retirees did not scale back, but only purchased more to rent out or give to their married children as inheritance or loans.
Fourth, I predicted that there would be an uninterrupted supply of housing through urban redevelopment, but the government killed that option to prevent people from making profit out of development projects.
In conclusion, my theory went wrong because supply fell way below the growing demand for decent homes and a better housing environment amid a general improvement in living standards, widening wealth disparities and changes in industrial structure.
The government defies the new phenomenon. It still blames speculative forces instead of the real demand for hot housing zones. It has quenched the fire through tax bombardment and loan restrictions and plans to press prices down further through increased supplies in satellite cities.
The market has calmed down after the government clampdown. But if supply does not keep up with demand, housing prices and the market will become imbalanced again.
The mindset must change. The government must turn its attention away from the affluent neighborhoods and concentrate more on housing for the working class and young people. Decent and yet affordable rent must become available so that young people will be encouraged to start a family. Home security will help solve both the low birthrate and wealth redistribution.
There should be a steady flow of rental properties in urban areas that are attractive for young residents. Redevelopment restrictions should be eased so that the locations can be used to build public rental properties. All the ongoing development projects around Seoul should be turned into permanent rent locations with accessible traffic connections to the inner capital as well as good education and child care facilities and a strong culture.
Young people cannot dream of owning a home. The government cannot solve the chronic housing problem overnight. It will have done a great deal of good if it can ensure home security for young people and the working class through affordable public rental properties.
JoongAng Ilbo, Sept. 19, Page 30