[Insight & Opinion] Solving Real Estate Issues Is Essential for Capitalism's Growth

The Beginning of Capitalism with Land Distribution
Maximizing Land Efficiency Drives Industrial Growth
Real Estate Bubbles Hamper Economic Growth
Premature Stimulus Measures Worsen Household Debt

The history of capitalism began as lands once monopolized by kings, nobles, and the church were gradually distributed to citizens. This was the case not only in England, which confiscated old church lands and sold them cheaply to the gentry (the origin of the word "gentleman"), but also in France, which, starting with the Great Revolution, distributed land ownership to many citizens, and in the United States, which granted vast tracts of land to citizens for free to promote settlement. Citizens who came to own land sought to use it more efficiently for industry rather than agriculture. These efforts eventually led to the Industrial Revolution. For example, the gentry who received land grants from King Henry VIII of England raised sheep for the wool industry instead of cultivating crops on their lands, laying the foundation for the textile industry and the Industrial Revolution.

Korea's industrialization was also greatly supported by various industrial complexes established at low costs in the past. For capitalism to develop, land should not be held by a few and used to increase wealth through leasing, but rather distributed at low cost to those in need to generate greater profits and utility.

However, the troubled relationship between capitalism and real estate has persisted for a long time. Every time the market economy enters a boom, the real estate bubble problem has dragged down growth. During the Great Depression in 1929 and the financial crisis in 2008, monetary tightening aimed at eliminating the real estate bubble, which was backed by massive private debt, triggered the crises. Japan's real estate bubble collapse around 1990 followed the same pattern and caused despair among its people for over 30 years.

In Korea, the crisis caused by the real estate bubble and concerns about it are ongoing. Real estate prices, which had abnormally surged under an interest rate below 1%, are now causing economic turmoil with issues such as real estate project financing (PF) problems and reversed jeonse (key money deposit) difficulties as interest rates normalize. Most seriously, the enormous amount of household debt absorbed by real estate means that effective demand will continue to be eroded.

While it may be unfortunate for multi-homeowners or "Yeongkkeuljok" (people who borrowed to the limit, even their soul) suffering from recent real estate price declines, I am concerned about the government hastily pulling out stimulus measures just because prices have fallen somewhat. During the 2008 financial crisis, the Obama administration in the U.S. did not implement artificial stimulus measures no matter how sharply housing prices fell. Instead, it worked to reduce household debt, lowering it from around 100% of GDP to about 80%. Despite the reduction in household debt, housing prices fell to levels attractive enough compared to income to attract actual homeowners, reviving the housing market. In contrast, Japan in the 1990s tried to prop up still exorbitantly high housing prices relative to income with various policies when prices fell somewhat, which, combined with sluggish demand, led to a prolonged stagnation that eroded the economy.

We must realize that without the price ceiling system on pre-sale prices and strong loan regulations, more greedy real estate PF projects would have been rampant, leading to greater risks and a much more severe economic situation with even more household debt. We should keep in mind that premature stimulus measures like Japan’s could prolong the pain of economic recession. Stimulus policies that allow a few asset owners to hold multiple homes only increase inefficiency and risk. Capitalism’s development, maximizing profits and utility, will occur when more citizens can purchase and own the land they need at prices sufficiently low relative to income. This is the last chance.

Seojunsik, Professor of Economics, Soongsil University

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