As the Korean stock market settles into the new era of KOSPI 5,000, President Lee Jae Myung and his administration are riding high on the success of their revitalization efforts. Just over six months ago, Lee began his term with a bold vision for the benchmark KOSPI, which many dismissed as just another pipe dream from an incoming president feeling high on an election win.
Even Lee himself must be marveling now at the world-beating achievements of the index, which was one of the best performers over the last year. Clearly brimming with confidence, the Lee administration has recently pledged to shift its focus to tackling the residential property market with similar vigor. It announced a series of taxes targeting homeowners with multiple properties. Compared to the stock market reform, policies surrounding the Korean property market are fraught with dangers that could have unintended yet severe consequences for the Korean economy.
The Korean press continues to celebrate the “money move,” which describes the shift of funds from low-yielding deposits into brokerage accounts as the primary driver of the Korean bull market. The core thesis behind Lee’s market reform was to make the local stock market a safe and transparent investment destination for local investors seeking long-term stable returns. Traditionally, the Korean stock market has been known for extreme volatility, with companies repeatedly undergoing boom-and-bust cycles. By promoting higher corporate governance standards and dividends, there are signs that Koreans are gradually embracing dividends as an alternative source of income in addition to capital gains on stocks.
While this long-term money move is a powerful catalyst, recent fund flows into the stock market suggest continual reliance on the rotational “hot money” that traditionally caused the overheating of the past. Since last year, the spectacular rise of the KOSPI has less to do with the government’s market reform efforts and more with the massive rally in artificial intelligence (AI), which has pushed Samsung Electronics and SK hynix to occupy 38 percent of the entire stock market. This is not unique to Korea, as Taiwan’s TSMC, another chipmaker in the AI space, accounts for nearly half of Taiwan’s main index. As Korean chipmakers continue their rise, the risks of another boom-bust cycle are looming for the Korean stock market.
Perhaps in recognition of this, Lee has shifted his focus to clamping down on the domestic property market, calling for reallocating funds from the property market to the equities market. It will be interesting to see how the policy is rolled out, given his priority on economic growth. Due to the high concentration of property ownership among Korean households, home prices are much more closely correlated with domestic consumption in Korea than in other countries. Korean households, on average, have almost 70 percent of their assets in property, versus less than 30 percent for U.S. households.
Therefore, even a temporary decline in home prices will amplify the downside to the economy, which last year recorded a tepid 0.8 percent growth in gross domestic product, with domestic spending supported by government spending. This year, the GDP growth target of 2 percent will depend critically on the recovery of exports and solid domestic consumption. A slumping property market could jeopardize the GDP target and possibly the “animal spirit” currently at work among Korean retail investors, buoying the stock market.
Clamping down excessively on domestic property ownership also poses greater risks beyond this year’s growth target, in the form of household debt. Korea has one of the highest household debt-to-GDP ratios in the world, driven by mortgage dependence and a high concentration of multi-home owners. The decades-long bull market in residential property has led Korean households to use all available leverage to buy additional homes, maximizing wealth creation. The situation ominously resembles Japan in the 1990s, when the government, in response to rocketing property prices, decided to tackle the property bubble with populist zeal, which not only burst the bubble but also led to long-standing “balance sheet recession.” The peak of the Japanese property market coincided with a demographic cliff, leading to Japan’s “lost decade.”
For Korea, such a disaster is unlikely, as its property market lacks the bubbly features of Japan in the 1990s, but Korean demographics do have strong parallels to Japan’s. With the rapidly shrinking population, real demand for homes will necessarily decline in the coming years. To clamp down on property for political reasons focused on investment speculation could lead to negative consequences for the broader property market, which is already weighed down by declining real demand. Therefore, the Korean government will have to strike a fine balance between economic growth and stability in its property market policy, which could pose a threat not only to the economy but also to the financial system, due to excessive household debt.
The most compelling part of the shift of money into the Korean equity market is the structurally low ownership of financial assets by Korean households, whose love affair with high-rise apartments has been the most powerful wealth creator since the 1950-53 Korean War. Shifting funds from property to the equity market is a tempting idea for the Korean government as it seeks to provide further momentum to the high-flying market. However, the idea that a downside for the property market immediately translates into an upside for the stock market is an oversimplification of a complex issue. Korean property, whose unique “jeonse” system of massive deposits in exchange for minimal monthly rent is interwoven into the Korean banking system and layered with restrictive policies, will require years, if not decades, of careful unwinding.
The widening income gap experienced by the Korean working class has been the core of left-wing ire and represents the greatest policy division between the two main political parties in Korea. The KOSPI achieving its “Korea Premium” goal poses a risk of destabilizing the delicate property market, with potential for a series of unintended consequences.
Source: Korea Times News
