Don’t use the rates as a real estate policy tool

Home > Opinion > Columns

Don’t use the rates as a real estate policy tool

Published: 14 Oct. 2024, 19:58

Ha Hyun-ock
The author is an editorial writer of the JoongAng Ilbo.

Interest rates represent the cost of money. They can influence the demand for capital and play a decisive role in restricting the choices of individuals making leveraged purchases of homes or stocks and the decisions of companies on verious investments. Consumption and investments decrease when rates go higher, and the vice versa when they go lower. The central bank loosens or tightens the lid on the liquidity faucet with its rate decision.

The Bank of Korea has slightly relaxed the tap on liquidity for the first time in 38 months with its latest rate cut in hopes to boost the lethargic domestic demand. With inflation anchoring closer to the 2-percent target, the central bank shifted its policy focus to boost the economy. But there are notable risks. The lowered borrowing cost can fan the leveraged home buying spree to upset the efforts to contain household debt and inflation in home prices. This explains why the latest rate decision was not unanimous. The increase in household debt and the risk of their souring undermines financial stability. But the bigger worry is the impact on home prices.

The central bank could bear the blame for the overheated real estate market if housing prices further jump from a rate cut. Its dilemma stems from the notion of regarding the rates as a real estate policy tool. When housing prices fail to come down despite a cascade of measures, the previous Moon Jae-in government turned to the BOK to act as firefighters by pressuring it to raise rates.

The BOK’s rate path will rely on the housing market. Home prices will likely dictate the pace of easing, and the posh Gangnam area in Seoul will be the frontline. Home prices plateaued after the government tightened loan regulations, but apartment prices in Gangnam remained unaffected. The long-held myth about the invincible Gangnam home value feeds the inflation in apartment prices. The Gangnam property market has become the biggest stumbling block in the BOK’s monetary policy.

The BOK has been an open critic of the overconcentration, overheated education and housing fever around Gangnam. In an interview with the Financial Times last month, BOK Gov. Rhee Chang-yong argued that the cutthroat competition was driving up house prices and borrowing, exacerbating inequality and accelerating depopulation in provincial areas. The BOK Issue Note published in August further echoed this logic.

This diagnosis demands attention as monetary and fiscal policies cannot be enough to solve the labyrinthine problems causing structural low growth for the country. The BOK’s prescription has been controversial. In the interview, Rhee called for “drastic solutions” to encourage people to leave the capital and proposed a cap on admissions to top universities by kids from Gangnam. The Issue Note in August also prescribed bigger university admission quotas for students from provincial regions. To stop over-representation of students from Gangnam in top universities, the central bank proposed aligning admissions in accordance with applicants from other regions to help fix the skewed home value in Gangnam.

It is important to ease the inequalities in educational opportunities across the country to ensure fairness in learning. But the BOK’s proposition is too hazardous. Restricting education opportunities in a certain location to support diversity in a university’s population is reverse discrimination. The concept of dividing and segregating goes against the Constitution and harms the basic rights of students. It is also unfair to stigmatize and disadvantage people from a certain area.

Invading universities’ sovereignty in admitting students for a real estate policy also is absurd. Universities already run their own programs to recruit talents from regional areas to ameliorate inequality. The suggestion of differentiating the finish line — instead of trying to equalize the starting line through amendments — can cause more distortion in the college entrance system.

The home inflation in Gangnam cannot be explained by education competition and zeal alone. Many wish to own homes in Gangnam because of the appeal in its secured value amid ever-changing regulations on loans and real estate policy. The factors behind home prices are not that simple. Blaming the problem entirely on the education fever and the college entrance competition comes from a lack of understanding in education and the real estate market. The Gangnam prices have become so mighty that the central bank has come to propose reverse discrimination.

Translation by the Korea JoongAng Daily staff.