Lee Min-hyung joined The Korea Times in 2014 and has worked as a journalist mainly in Korea’s finance, tech and automotive industry. He specializes in content creation, breaking news and in-depth analysis currently on transportation and mobility. You can reach him via mhlee@koreatimes.co.kr.
Wealth disparity to widen throughout 2021
The ongoing asset price inflation will increase the gap between the rich and the poor here in 2021. Getty Images Bank
By Lee Min-hyung
Soaring housing prices, virus uncertainty expand gap between rich and poor
By Lee Min-hyung
The wealth disparity between the rich and the poor will widen throughout 2021, as asset price inflation particularly in the property market will continue to polarize society at a much more alarming pace this year.
What is of concern is that the government has only a few realistic cards to play against the deepening social imbalance at a critical juncture when the financial authorities should focus their policies on revitalizing the virus-hit economy and helping the self-employed and companies on the verge of collapse bounce back from the COVID-19 pandemic shock.
This is no exception for the Bank of Korea (BOK). The central bank has had no choice but to maintain its super-low benchmark interest rate to rev up the sagging economy despite lingering concerns over surging household debt. After the pandemic aftershock started engulfing the economy in March 2020, the central bank and other financial authorities took quasi-quantitative easing measures to expand liquidity in the market.
But taking advantage of the low lending rate and depreciation of the currency, many Koreans went on a buying spree of apartments in Seoul and other major cities nationwide, resulting in a sharp rise in property prices. This has left renters ever more frustrated, as the ever rapid increase priced them out of the market.
Those who grabbed the so-called “last chance” to purchase houses in Seoul last year, however, have enjoyed asset price inflation which will continue to remain in place throughout this year amid lingering virus uncertainties here and abroad.
An apartment complex in Seoul is seen in this file photo. Yonhap
According to data from Statistics Korea, the polarization of housing prices is deepening. As of the end of 2019, the average housing price in the top 10-percent bracket came in at 1.1 billion won ($1.01 million), while that in the cheapest 10-percent category was merely 27 million won. This is a gap of more than 40 times, according to data from the statistics authority.
Chances are high that the disparity widened further in 2020 when the government implemented a series of tough housing regulations which ended up pushing up housing prices in most speculation-prone areas ― such as Seoul and nearby cities in the surrounding Gyeonggi Province.
The government's tax-driven regulations on multiple homeowners have so far failed to work effectively. Last year, the government raised acquisition and transfer taxes on those who owned more than two apartments amid hopes for housing market stabilization. But with most of them deciding not to sell their properties, the market has been distorted further and this has ended up raising apartment prices.
This produced frustration for those particularly in their 20s and 30s who do not have enough savings. They complain that the failure in the real estate market has cut them off from the social ladder to the middle class.
BOK Governor Lee Ju-yeol also raised concerns that the economy would likely have a K-shaped “recovery” in 2021 by driving those in the low-income bracket further into a corner.
“The top priority for the government should be stabilizing the housing market to slow down the polarization between the rich and the poor,” Kwon Dae-jung, a real estate professor at Myongji University, said.
Multiple homeowners are taking a wait-and-see approach due to the steep rise in transfer tax, and this will keep distorting the market, according to him.
“The government should focus on normalizing transactions in the housing market by offering tax incentives for homeowners, but authorities are unlikely to do so for the time being,” he said. “The market will never be stabilized at all if the government keeps interrupting the market and introducing more regulations.”
The more regulations authorities introduce, the most likely wealth disparity will deepen across the society, according to him.
But other experts voiced the need for the government to reshape the taxation system in a tighter way, so multiple homeowners will sell some of their houses.
“From the macroeconomic viewpoint, the government cannot increase the interest rate, nor impose lending rules simply to stabilize the housing market at a time when external economic uncertainties remain in place,” Kang Hyun-ju, a macroeconomist at the Korea Capital Market Institute, said.
“It would be much more effective for the government to impose a higher level of possession tax on multiple homeowners,” he said. “Taxation is the most effective means of policy that only affects the price, having little impact on other areas. My advice is focused on increasing the possession tax, so people are less motivated to own many apartments for a long period of time.”
The latest data also showed that more people believe housing prices will soar further this year.
According to a survey by the BOK, the housing price forecast index set a record high of 132 points in December, up 2 points from a month ago. This is the highest since the central bank started compiling data in January 2013.