"Bubble to Expand Further for a While... Likely to Collapse Easily Even from Small Shocks" [Asset Bubble Warning]

Urgent Diagnosis of Asset Bubble Written Debate

Overseas Liquidity and Housing Demand Likely Prevent Sharp Correction Until Q1
Stock Market Expected to Rise Until End of February, Real Estate May Plunge Like Japan
High Risk of Debt Investment and Financial Risks, but Household Balance Sheet Weakness a Concern

[Asia Economy Reporters Eunbyeol Kim, Yuri Kim, Minwoo Lee] Economic experts have recently diagnosed the asset price surge phenomenon as "the asset market is likely to continue growing for the time being, but the situation is clearly risky." They expressed serious concerns especially about the rapid expansion speed and the increase in loans taken to raise investment funds. However, considering the domestic and international conditions where funds have nowhere else to go, they added that the phenomenon of the stock and real estate markets absorbing funds will not easily disappear. On the 12th, Asia Economy held an urgent asset market diagnosis remotely (untact), with participation from Professor Donghyun Ahn of Seoul National University’s Department of Economics, Professor Sangbong Kim of Hansung University’s Department of Economics, Economist Jonghoon Park (Executive Director) of SC First Bank, Research Center Director Changyong Yoon of Shinhan Financial Investment, and Senior Real Estate Specialist Wongap Park of KB Kookmin Bank.

- How long can the rapid rise in asset markets such as real estate and stocks continue?

△ Donghyun Ahn, Professor of Economics at Seoul National University (hereafter Ahn) = Due to overseas liquidity and the desperation of individuals without homes, I think the possibility of a sharp correction until the first quarter is low. However, I find it hard to agree with the ruling party’s commentary that the credibility of our capital market has increased. I believe the stock market is just trend-following investment by individuals who find real estate investment difficult. Real estate cannot be resolved simply by suppressing demand through government regulations. Taxes (transaction costs) inevitably burden prices. There is enormous demand waiting, but supply is properly provided, causing supply-demand imbalance, which has raised housing prices and will continue to do so.

△ Sangbong Kim, Professor of Economics at Hansung University (hereafter Kim) = The stock market is not a bubble, but real estate is. Over the past 10 years, GDP has increased by 46%, but real estate prices in major cities have risen 2 to 3 times (200-300%). Meanwhile, the stock market has only risen about 40-50% over 10 years (as of the end of November last year). If you multiply the KOSPI index by GDP growth, it could rise to 3400-3500. The stock market’s upward trend may continue until the end of February, followed by a slight correction. On the other hand, real estate could crash sharply like Japan in 1989.

△ Changyong Yoon, Research Center Director at Shinhan Financial Investment (hereafter Yoon) = The abundant liquidity environment after COVID-19 is unlikely to change easily for the time being. The proportion of individual trading in the domestic stock market, which approaches 70%, and the increase in stock investment through retirement pensions are changes not seen before. The abundant standby funds in the stock market will act as a support factor when the market declines.

△ Wongap Park, Senior Real Estate Specialist at KB Kookmin Bank (hereafter Park) = Housing and the KOSPI index have a positive (+) correlation. Money earned in the stock market is likely to flow into real estate. The money supply (M2) exceeds 3,000 trillion won, and recently, the trend of housing as an asset has intensified, making the housing market sensitive to interest rates and liquidity. The asset market’s strength will continue at least until the first half of the year, and in the second half, concerns about interest rate normalization will spread in the market, showing a ‘high start, low finish’ pattern. The ‘Japanese-style collapse’ of real estate is unrealistic. However, we must not forget that inflated prices can burst with even a small shock. Housing prices will rise slightly this year, but the most worrying part is the jeonse (long-term lease) market. Stabilizing the jeonse market is the top priority for the housing market.

- The rapid rise in asset prices is driven by ‘debt investment (borrowing to invest)’. What are the problems with private debt reaching 200% of GDP?

△ Ahn = The financial system is unlikely to be a problem. Since most loans are collateralized, even if real estate crashes, the risk is unlikely to spread to the banking system. The problem is that household balance sheets may deteriorate and burdens increase.

△ Jonghoon Park, Economist at SC First Bank (hereafter Park Jonghoon) = When corporate and household debt each exceed 80% of GDP, it is considered the end of the debt cycle. Various risk indicators point to a bubble. However, unless inflation surges, the world will likely continue to inject money to drive the economy until recovery becomes visible. The longer this period lasts, the bigger the bubble will become. If asked whether it is a bubble, yes. But if asked whether it will burst immediately, I don’t think so.

△ Park = It is currently at a manageable level. But it can pose a major risk during crises or interest rate hikes. From an individual perspective, it may feel unfair, but from a macroeconomic stability standpoint, debt management is inevitable. For first-time homebuyers and other actual residents, more relaxed loan standards than now should be applied.

△ Yoon = There are concerns about debt investment, but it is limited compared to the past. Credit balances have surpassed an all-time high (20 trillion won), but the flow is stable relative to market capitalization. The proportion of individual stock credit purchases is also below the post-financial crisis average level (around 11%) due to strict risk management by securities firms.

- Some view the stock market surge positively. Can it be seen as a process of resolving the ‘Korea discount’? Can stock market funds lead to corporate investment?

△ Ahn = I think corporate investment is something that only appears in textbooks. The logic is that if stock prices rise, companies can conduct rights offerings and IPOs, creating an environment where many venture companies go public, but the reality is different. It is questionable whether companies would undertake rights offerings while bearing owner risks. Korea does not have a long-term investment culture like the U.S. Foreigners and institutions may realize profits after securing target returns, but it is doubtful whether individuals with high credit investment proportions will invest long-term.

△ Park Jonghoon = In the past, Japanese companies did not invest with stock market funds but only repaid debt (debt financing). A situation where ‘households borrow to repay corporate debt’ should not occur. While corporate fundamentals support the market, prices have risen sharply, so caution is needed now. Although Donghak ants (retail investors) support the market, humans are the most selfish beings. If the market trend changes, Donghak ants may also panic sell.

△ Yoon = There is additional upside potential in the domestic stock market. Considering the continued upward revision of corporate earnings forecasts, the KOSPI index could rise to 3300. The attitude of individual investors toward stock investment has also changed compared to the past.

- What about the possibility of taper tantrum (a phenomenon where emerging market stocks and currencies plunge due to advanced countries’ quantitative easing (QE) reduction)?

△ Ahn = Since the U.S. Federal Reserve (Fed) has firmly stated it will keep interest rates unchanged until 2023, it seems difficult to change. The problem is that market interest rates are rising first. Due to economic stimulus, inflation expectations, and risk appetite, money is being withdrawn from the bond market and moved to risky assets. If market interest rates rise, the Fed will respond technically and set an upper limit.

△ Kim = The Fed will respond to market interest rate rises by issuing bonds and maintain zero interest rates. The problem is Korea, which is not a key currency country. Rather, Korea may need to respond by raising the base rate twice in the second half of this year.

△ Yoon = The possibility of early monetary policy normalization is low. Monetary policy depends more on the employment market than inflation, and employment recovery will take more than three years.

△ Park Jonghoon = There is a possibility, but it will not appear within three months. If U.S. market interest rates exceed 1.5% and reach around 1.75%, global investment funds may return to the U.S., drying up liquidity.

- What solutions would you suggest for the asset inequality problem?

▲ Kim = It is clear that the government handing out money will not solve the problem. Perhaps the opposite of the methods that have increased asset inequality should be done.

▲ Ahn = I believe controlling housing prices is ultimately the solution. I hope people remember that housing prices cannot be artificially controlled by the government but must be addressed by loosening supply and demand.

▲ Park Jonghoon = The U.S. solved this in the 1920s with socialist capitalism, that is, Keynesian capitalism. Policies are needed where the wealthy give back to society through donations or antitrust laws.

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