A repeat of the same disaster

Koh Hyun-kohn
The author is a senior editorial writer of the JoongAng Ilbo.

Koreans faced two housing upheavals over the past two decades. The first was from 2002 to 2008, and the second started in 2016 and is ongoing. Both bouts of real estate turmoil happened during the terms of liberal presidents Roh Moo-hyun and Moon Jae-in. Real estate therefore could be a nightmare for the liberal front. They could be more frustrated as they represent the working class. They are startled at the worsening wealth disparities due to a spike in housing prices.

Out of frustration, ruling Democratic Party (DP) Chairman Lee Hae-chan even called Seoul a “vulgar city.” The government has bombarded homeowners with taxes. A real estate supervisory authority sprung into action to keep watch over the market. The DP and government justify all their actions saying they are aimed at protecting tenants.

But they have enraged tenants with nonchalant comments like “monthly rents are better than jeonse!” The Blue House forced its staff to dispose of any extra homes. They did not care if they were infringing on the civilian rights of the property owners. One senior presidential aide was sacked for defying an order from above to sell his expensive apartment in Gangnam District, southern Seoul.

Government officials murmur they also cannot keep up with the 23 sets of real estate measures to control soaring real estate prices. But all the medicines have been of no use because the illness has been ill-diagnosed and the medicine wrongly prescribed. The biggest culprit lies with the failure in monetary policy. Policymakers are clueless if they think they can tame housing prices and hearts of the people if they suppress the rich.

Before the first real estate market turmoil, the economy was bottoming out in 2001 amid recovery from the dotcom bubble crash. The central bank should have raised interest rates from 2002. But it only made one increase as it might not have wanted to ruin the Kim Dae-jung administration’s wish to end its term with a successful turnaround from the 1997-1998 financial crisis.

Easy liquidity also could have helped the presidential election in favor of the ruling party. The goals were reached as the economy ended 2002 with a surprising 7.4 percent jump. Roh Moo-hyun from the ruling party also won the presidential election.

But the price of the overheated economy in 2002 was dear. The Roh government grappled with a credit card bubble burst. The Bank of Korea lowered the policy rate from 2003 to 2004 to prevent a liquidity squeeze in the financial sector. The U.S. Federal Reserve, however, was raising rates as the country slowly recovered from the Sept. 11 terrorist attacks.

Housing prices soared in Korea on the back of excess capital. The central bank belatedly raised rates while the government created a new property tax on expensive and multi-homeowners and regulated loans. But the heat went on, until it was stopped by the external 2008 global financial crisis.

The Roh administration wrestled with real estate market throughout the term. By the time he resigned, Roh was one of the most unpopular presidents with his approval rating at 12 percent. In his memoir, Roh recalled he had consulted his aides and cabinet members whether the government should regulate liquidity. All of them said it was unnecessary. “I should not have believed them,” Roh wrote.

Housing prices began to rise again from 2016, with interest rate policy the trigger. The United States began to taper off the quantitative easing program and push up benchmark rates from 2015 as the economy finally showed signs of recovery. But the Bank of Korea went the opposite direction and pushed down rates from 2015 to 2016 as the Park Geun-hye government used real estate stimuli to boost domestic demand. After Moon took office in 2017, the central kept the rate in the 1 percent range even when America raised its target range up to 2.5 percent. The cheap capital flooded into the real estate market. Housing prices jumped again when the rate fell to a record low of 0.5 percent in March amid the corornavirus shock.

We are witnessing a repeat of the failures under the Roh government. Authorities have overlooked liquidity and barked at the wrong tree. The Moon government held up the wrong monetary policy of the past government and worsened problems.

The government and ruling party officials blame the past government for the skyrocketing housing prices. They are not entirely wrong since low interest rate policy has worsened the matter. But the liberal government was created after impeaching the former president to fix the past mistakes. They have achieved no cures over the last three years and now transport the blame onto the past government.

Authorities must seriously study whether low interest rates work to aid the economy. It is a textbook theory that when the interest rate is lowered, asset prices go up and wealth increases as well as consumption. But the theory has not been working for a long time. The middle class should be strong for asset prices to increase, but cheap money has only helped the rich and raised their assets’ value to worsen inequalities.

Ample liquidity is still concentrated in the real estate and stock markets. Although the stock market is in a bull thanks to individual investors, much of the investment is speculative. The stock and the real estate markets are going strong even as the economy slows down. As long as the cost of money is low, the housing price rally will not stop.

The economy is only headed for a crash as the asset bubble burst in Japan in the 1990s.