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Speculation is not the problem

History shows that countries with greater market freedom are advanced in distribution, social mobility and happiness.
July 10,2017
New Minister of Land, Infrastructure, and Transport Kim Hyun-mee blamed speculation and illicit means of property inheritance for skyrocketing apartment prices. She vehemently disagreed with the argument that the overheating in the housing market comes from a shortage of supplies.

She has demonstrated ignorance in economic theory in her understanding that speculation stokes overheating in real estate markets. If that is true, no one would invest in real estate properties as a fall in home value could turn people into beggars. Expectation for higher property values is what motivates speculation. Speculators themselves do not push up real estate prices.

The market won’t stabilize and run efficiently if speculative demand is wiped out as Kim claims. Real potential buyers with affordability to buy a single home to live in do not easily move to make the purchase if there is a possibility that its value could fall amid foggy market prospects, or mortgage loan rates could go higher. If there is only this kind of conservative demand, the supply pipeline would eventually dry up. New supplies appear because there are those investing in future value.

A mismatch in supply and demand is natural in high-risk and high-return markets. Adventurous investment can help to compensate for the gap.

Apartment supplies stayed tight for years because builders had put off new construction due to a lackluster appetite for new homes. Farsighted investors whom the land minister labeled as speculators had betted demand would increase due to a narrowing gap in home and rent prices in a low-interest-rate environment.

The argument that a group of speculators push up apartment prices is misleading. A landlord owning multiple homes cannot live in all of them. They would rent them out. When these supplies come out and overwhelm the market, rent and home prices would plunge. The market therefore is not influenced by the homeowners, but the aggregate demand and supply.

The minister and others who believe a real estate bubble results from speculative demand overlook a unique character of the Korean housing market. Our living standards have dramatically changed from the poor days in 1960s. Rural houses have shifted from tenement homes to apartments.

Apartments also vary from those built in the 1970s when per capita income was less than $300 and in the 1980s when income averaged $1,700. The apartments and homes are too run-down and uncomfortable to satisfy today’s middle-income people whose individual income near $30,000. Our case is entirely different from the Western societies whose housing style stayed unchanged for 200 years. Urbanization and modernization that should have proceeded upon consumer demands was unilaterally decided by the rigid and uncreative group of bureaucrats.

I worry about Kim’s view of the real estate market in fear of a replay of the failed real estate policy of the administration under liberal President Roh Moo-hyun. Owning multiple homes was regarded as sin, and the administration quenched demand instead of increasing supplies. The market was wrecked.

The government ups regulations with the rationale that the market is being disrupted by predatory forces. The market loses freedom and sovereignty if there is too much influence and control. Politicians love enemies because that makes their job easier. Economic problems worsen if fundamental causes are overlooked. History shows that countries with more market freedom are advanced in distribution, social mobility and happiness. Income disparities and distribution mechanisms weakened under Roh because of a steep spike in property value.

If over-emphasis of ethical principles paint market forces as evil, the economy becomes politicized, innovation killed, and lives harder. Kim’s scorn and the economic policies of President Moon Jae-in are drawing lines between good and evil. By justifying good intentions, the public role is becoming bigger and heavy-handed. It raises questions whether the liberal administration learned anything from the failures of former president Roh.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, July 8, Page 25

*The author is a professor of information systems at KAIST College of Business.

Lee Byung-tae