[Takryucheongron] Bubble Signs Everywhere... Further Strengthening of Real Estate Loan Regulations Needed

Professor Kim Sang-bong, Department of Economics, Hansung University

The rise in housing prices that began in 2018 has now spread nationwide. There are various causes for the formation of a bubble. As of the end of 2019, there is 1,038 trillion won in idle funds circulating in the market, and these idle funds immediately flow into asset markets perceived to have high returns.

Behavioral economics deals with the feedback theory, where expectations of price increases lead to actual price increases, which in turn reinforce the expectations of further price increases. When psychological factors such as wealth accumulation through speculation, confidence and desire regarding the trend of rising real estate prices, and conformity to avoid deviating from collective behavior or judgment are added, the feedback process between expected and actual price increases is further strengthened, forming a bubble.

Korea's housing market shows a similar pattern. As real estate prices rise, people take out loans to buy houses, which causes housing prices to rise again. The ping-pong between expectations of price increases and actual price increases has become more frequent due to people's confidence or conviction in the invincibility of real estate. The problem is that when such a speculative bubble bursts, the economy can enter a large-scale recession.

In the cases of the United States and Japan, crises both started in real estate. Since the second half of 2004, the U.S. raised its benchmark interest rate 17 times up to 5.25%. The decline in housing prices caused by the interest rate hikes led to a drop in collateral value, triggering defaults in subprime mortgages, which eventually resulted in a financial crisis.

Japan, after the 1985 Plaza Accord, faced difficulties in exports due to the strong yen and lowered interest rates to stimulate domestic demand. The liquidity released into the market flowed into real estate, causing housing prices to soar more than threefold over five years from 1986 to 1991. However, as interest rates rose after 1990, the inflated housing prices fell by more than 80%, and Japan's housing market experienced a prolonged slump.

Warning signs are appearing in Korea as well. The private sector's loan-to-GDP ratio has already risen to the top ranks among OECD countries. Meanwhile, the predicted timing of population decline due to low birth rates is gradually moving forward. In this situation, if the rise in housing prices is neglected, no one will be able to take responsibility after the bubble bursts.

After experiencing crises, both the U.S. and Japan strengthened government intervention in the housing market. Following the subprime crisis, the U.S. tightened regulations on mortgage loans and abolished tax deductions on mortgage interest. Banks became more stringent in verifying borrowers' repayment abilities. Japan was the first to reduce lending, introducing total loan volume regulations to allow loans only within the asset range held by individuals, and effectively banning loans to real estate-related industries and construction for a certain period.

Korea is also implementing various regulations to ensure a soft landing in the housing market. Financial and tax policies are necessary, but especially for the country's macroprudential stability, it is essential to strengthen regulations on loans. The allowable loan amount for housing should be lowered, and borrowers' repayment ability and actual residence status should be thoroughly verified to suppress speculative demand swept up by the market. Barriers to entry must be established to prevent the massive liquidity released by the prolonged low-interest rate environment from flowing into the housing market and disappearing as a bubble.

Finally, continuous supply signals are needed to ease market speculation and protect genuine demand. Alongside large-scale supply policies such as the 3rd New Town projects, small-scale redevelopment projects within Seoul and increasing floor area ratios in semi-industrial areas should be continuously promoted to supply housing in urban centers. When supplying new housing, it will also be important to carefully ensure that housing is allocated primarily to genuine demanders.

Kim Sangbong, Professor of Economics, Hansung University

This content was produced with the assistance of AI translation services.