INTERVIEW 'Basic market principle has no place in Korea'

Seoul National University Economics professor Lee In-ho, who will take the helm of the Korea Economic Association from February, speaks during a recent interview with The Korea Times at his office in Seoul. / Korea Times photo by Shim Hyun-chul

State intervention sparks speculation in housing market

By Lee Kyung-min

The government's repeated attempt to regulate home prices has led to rampant speculation in the housing market as such move has only fed expectation that there is room for “further hike,” a senior economist said.

“The basic market principle has no place in Korea, at least for now,” Lee In-ho, economics professor at Seoul National University, said in an interview with The Korea Times at his office in Seoul, Oct. 24.

The government and the ruling Democratic Party of Korea has been desperate to curb housing market overheating, saying those in the affluent Gangnam area in southern Seoul with soaring home prices should be “dealt with.”

The right and more rational way to do that will be letting the property market boom which would inevitably result in some failed investments involving those who bought when the price peaked and sold off after experiencing unmanageable plunge.

This would be how a market should and would work, absent the current frantic government efforts.

“It's futile. It's that simple,” said Lee who will take the helm of 5,000 member Korean Economic Association whose term from February 2020.

“Unless the price goes straight up without any adjustments, those who bought at a high price in a certain cycle will lose money and other market participants will learn that property speculation does not always guarantee a windfall. Once they think the price may well drop, the doubt will make people not buy regardless of, or sometimes despite government moves to either buoy or curb the market.”

Placing a price ceiling, while understandable on the face of it, is an amateurish, desperate approach sure to fail, according to the former Korea Academic Society of Industrial Organization president who holds a master's and doctoral degrees in economics at the University of California Los Angeles (UCLA).

If there's one thing you cannot manipulate, it is expectation, he said.

“If the government tells people to buy property saying the price will surely rise, nobody would. By contrast, if it vows to go all-out to have the property prices under control, people laughingly rush to buy more. That's what's happening now.”

During the previous Lee Myung-bak and early Park Geun-hye administrations, the property price barely moved and even fell, despite various government efforts to bring “vibrancy” in the housing market.

This was only expected because people gathered Lee, best known for his decades of construction expertise, would seek a “boon” during his five-year term by pumping up property market. They did not want to be a loser trapped in what they thought was a game which only Lee and a handful of his cronies would come out a winner.

Now, on the other hand, home prices are breaking record-high triggered by government plan to place a price ceiling.

According to data submitted to Rep. Kim Doo-kwan of the ruling Democratic Party of Korea from National Tax Service, those who sold homes in less than three years after buying them netted themselves a combined 23 trillion won over the past five years.

The transaction volume also soared to 205,898 in 2017 from 118,286 in 2013.

In the same period, those who sold homes in over a year and less than two years gained over 2.4 trillion won in 2017, over three-fold increase from the 610 billion won in 2014.

“The solution remains elusive, unless the government realizes that certain things should be left for the market to decide.”

Professor Lee said, “Making people jump off cliff ignoring gravity? That's fraud.”

Suppose there is a leader who encourages people to jump off a cliff saying everybody is free to fly.

On the face of it, the emotional emphasis on “free spirit” associated with flying might for a second sound liberating, or even inspiring.

But none would be so senseless to understand actually doing that will lead to death as an inevitable result of gravity, a force that pulls people toward the ground regardless of how much they want to fly or whether the premise “everybody is free” is faulty.

Gloomy economic outlook

Making people jump claiming they can fly while ignoring gravity, a major constraint to people flying, in that sense is no less a fraud, Lee reckons.

“It is essentially asking them to kill themselves.”

A 30 percent increase of hourly minimum wage over the past two years, a measure he said lacked consideration on an array of constraints and the subsequent deadly consequences, led to “countless deaths” of small- and medium-sized enterprises (SMEs).

The much-criticized economic policy among many other factors will push down the country's growth rate to 1.5 percent within the next 10 years, a rather gloomy yet highly probable outlook given the country's rapidly falling birthrate amid fast aging population leading to declining labor force.

There is, Lee said, no immediate, silver-bullet solution for the long-term problem. The situation is likely to worsen given the notoriously rigid labor market undermining work productivity.

“Gravity exists whether they are free to jump or not. The government policy lacking feasibility and considerations on constraints is bound to fail,” Lee said.

He said he would give the Moon Jae-in administration a D on property market policies, and a C for overall economic policies.

“Since I don't give an F, D is as low as it could go. C means the government did nothing good.”