[Yoo Choon-sik] Rising housing prices in Seoul and trust in policy

An efficient economic policy is not necessarily one that simply achieves its intended goal regardless of side effects, but rather one that economic players trust, believing it was based on a correct assessment of the situation and expected effects from the policy.

Measured against this criterion, South Korea’s recent policies and top officials' comments on rising house prices in the capital area fall short of being efficient -- not because they will fail to curb housing prices, but because they are not aligned with the people’s assessment of the current situation.

The Ministry of Economy and Finance and the Ministry of Land, Infrastructure and Transport announced early last month plans to supply more than 80,000 housing units in Seoul and adjacent areas over the next six years by removing restrictions on developing greenbelt areas for the first time in 12 years.

Choi Sang-mok, minister of economy and finance, told reporters the key to stabilizing the real estate market lies in supplying enough housing units to meet demand and managing liquidity at an appropriate level. However, the government provided little information about their assessment of the current situation and the expected effects of the plans.

Two weeks later, financial markets were engulfed in confusion surrounding the outcome of the central bank’s regular policy meeting, at which the monetary policy board decided to keep the base rate unchanged at 3.50 percent. It has been held steady since early last year, marking the longest period on record.

The decision itself was not a surprise, as it came in line with market expectations -- 16 out of 19 analysts surveyed by Yonhap Infomax had predicted no change, while three predicted a cut. However, the market was puzzled when none of the six board members voted for a cut.

The confusion further deepened when an unnamed senior official at the presidential office expressed regret on the same day that the Bank of Korea had not lowered interest rates despite depressed domestic demand. This comment was perplexing because the central bank’s decision came two weeks after the finance minister emphasized the need to manage liquidity at an appropriate level.

In other words, the central bank kept interest rates unchanged in a unanimous vote, consistent with the finance minister’s view on liquidity management. Yet, the presidential official’s comment suggested the government had expected a rate cut.

The central bank manages monetary policy independently from outside forces, so its decisions need not align with the expectations of government agencies, such as the Finance Ministry or the presidential office. However, the confusion stemmed from a lack of public trust in different policy authorities sharing a common assessment of the current situation and direction of the real estate market.

Data from KB Financial Group shows the nationwide housing price index was 0.30 percent lower in August than a year earlier, better than the 0.47 percent drop in July but still marking the 22nd consecutive month of decline. The index for Seoul rose 1.03 percent in August from a year earlier, on top of a 0.47 percent gain in July.

It rose for the second consecutive month in Seoul but follows a 20-month streak of year-on-year declines. In other words, the housing market is far from overheating, with the nationwide index still 7 percent below the level before the slump began in late 2022, and Seoul's index 5 percent lower.

Moreover, it is doubtful that delaying a widely expected rate cut by a few weeks will significantly impact the real estate market, especially when the central bank agrees that weak domestic demand is more concerning than inflation.

Given that housing prices are rising only in a few districts after nearly two years of sustained decline, the government needs to manage the pace of price growth through more tailored and careful policy measures. In contrast, the central bank’s interest rate policy is widely taken as one of the most blunt tools globally, as it applies indiscriminately to all sectors of the economy.

As the presidential official pointed out, interest rate policy should be managed after a more comprehensive assessment of overall economic conditions, particularly domestic demand. The latest data shows domestic demand continued to weaken despite robust exports led by a few products.

The all-industry output index fell in July from June for a third consecutive month, marking the longest uninterrupted decline in nearly two years, according to Statistics Korea data released after the central bank’s policy meeting. The retail sales index also fell sharply by 1.9 percent in July from June.

A few days after the central bank downgraded its forecast for this year’s economic growth, President Yoon Suk Yeol said the country’s economic recovery is gaining momentum during his news conference. These contradictory assessments between the president and the central bank further weaken public trust in policy authorities.

The government’s recently unveiled budget plans make it clear that next year’s fiscal policy will maintain a tightening stance by keeping overall expenditure growth at a minimum. While it is understandable that the country cannot be complacent about increased public debt, it raises the question: who, then, will be spending money to keep the economy going?

Yoo Choon-sik

Yoo Choon-sik worked as the chief Korea economics correspondent at Reuters and is now a business and media strategy consultant. The views expressed here are the writer’s own. -- Ed.