South Korea's Sisyphean Struggle With Property Prices

Ahead of South Korea’s 2022 presidential election, prospective candidates will undoubtedly debate the root causes of why property prices in the country have risen tremendously over the past few years. This market trend is the source of increasing economic anxiety felt by the general public and a major cause of dissatisfaction toward the incumbent administration. However, calls by presidential aspirants to tweak this tax or that regulation are unlikely to address the instability.

The roots of the problem are deeply embedded in the social structure of modern South Korea – and tackling them will require political capital that will be difficult for any head of state to obtain in the current polarized environment.

Ghost of Real Estate Policies Past

There is simply no way to spin the reality: President Moon Jae-in’s efforts to stabilize the housing market have been unequivocal failures. Apartment prices in Seoul rose by 52 percent in the first three years of the administration’s tenure. Some of this can be attributed to the government’s intervention aimed at disciplining market demand through price caps and taxes without addressing the housing deficit.

However, counterproposals to simply deregulate the housing market are not guaranteed to stabilize prices. Afterall, the current property bubble began under the previous Park Geun-hye administration, when the government removed regulations on mortgage borrowing and other key checks in 2014. These measures had been responses to the growing deficit in housing supply as stagnating prices discouraged many homeowners from selling properties acquired during the boom years in the mid-2000s. Policymakers in the Park administration believed that increasing people’s ability to offer higher prices through access to more loans would encourage homeowners to sell their property and simultaneously incentivize developers to build more housing units. The subsequent failure of this market-driven solution to produce a more inclusive housing market is a cautionary tale for proponents of deregulation.

This overlooked precedent also hints at a complicating factor for policymakers tackling this challenge: A stagnant or falling housing market is also detrimental to the welfare of many households. With so many families investing much of their wealth in property, measures that successfully push down housing costs may damage household finances and exacerbate existing anxieties.

Given this backdrop, policymakers need to do more than merely manage the boom and bust cycles. Their imperative is to understand why the property market – particularly in Seoul – continues to have such an outsized impact on the whole economy. Two features of South Korean society help partly explain this phenomenon: heavy reliance on real estate as a retirement asset and the concentration of economic activity in the capital region.

Homeownership and Insecurity

Seventy-five percent of all household assets in South Korea are held in real estate. The disproportionate reliance on a single investment vehicle stems from the perception that land is the most secure retirement asset – and accompanying anxieties around living in poverty after retirement.

This fear may seem out of place in a country as wealthy as South Korea, but it is reaffirmed by the conspicuously high rate of elderly poverty in South Korea. Data from the Organization for Economic Cooperation and Development (OECD) in 2017 revealed that 43.8 percent of South Koreans over the age of 65 earn less than 50 percent of the median household income. These economic hardships push the Korean elderly to commit suicide at the highest rate among OECD member countries – about three times the average of this community of wealthy nations.

In this context, property serves as an important safety net for those who can afford it.

Widespread dependence on property – both residential and commercial – as a nest egg and/or a source of passive income came to the foreground during the initial waves of the COVID-19 outbreak. Polling revealed that nearly half of the surveyed public opposed the government’s proposal to impose mandatory rent reduction for distressed small retailers. Their stance was not just a simple case of individual greed overriding the public good – the vulnerabilities that many Koreans face in old age help explain why homeowners displayed such hostility toward the government’s proposal.

Taking this perspective into consideration, a deeper policy objective may not be stabilizing property prices but lowering the stakes people have in the housing market by addressing their underlying anxieties more directly through public policy.

A Capital City and the Rest of the Country

Housing price volatility is primarily an issue in the Seoul metropolitan area. Notably, home prices in other metropolitan areas across the country have fallen by 2 percent between 2017 and 2020. This fact should not diminish the scale of the problem as about half the country’s population lives in and around Seoul. But the disparity does suggest that the problem is tied to the outsized role that the capital city plays in the nation’s economy.

The public recognizes that the economic concentration around the capital has a direct impact on housing prices and household financial security. Public polling suggests that a growing number of people support the accelerated relocation of key public institutions out of Seoul because they recognize that it may have a positive impact on curbing the demand for real estate.

However, escaping the economic orbit of Seoul may be more challenging. In their recent proposal to move the National Assembly complex to the administrative capital at Sejong City, lawmakers proposed transforming the current site of the legislature in Seoul into a “fourth industrial revolution” science and startup cluster. In effect, this plan would further entrench the capital’s existing role as the country’s innovation and business hub, which would increase public demand for housing in the metropolitan region.

A Path Forward?

In July, Finance Minister Hong Nam-ki promised a policy reversal to stabilize housing costs in Seoul. And he rightly noted that previous efforts did not focus sufficiently on expanding the housing supply.

However, efforts that do not address the widespread economic anxieties and the concentration of the country’s business activities in Seoul will not fundamentally impact the root causes of the problem – they will simply manage the boom and bust cycles of Korea’s housing market.

Perhaps the bigger problem is that the fraught political environment may prevent the incumbent administration and its successor from carrying out the kind of overhauls that are required to radically redistribute resources between people and across geographies. After all, only one president since democratization in 1987 has ever been elected to office with more than 50 percent of the popular vote – and Park Geun-hye did not even finish her term. Moon Jae-in came into office with staggering public support, yet failed to reshape society. It is difficult to imagine that someone might arise from the 2022 election with greater popular and political support.