Policy failure to tame soaring home prices brings social mobility crisis

Policy failure to tame soaring home prices brings social mobility crisis

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Many young people feel that the ladder to socioeconomic mobility has crumbled

By Yoon Ja-young

Every year since his inauguration in 2017, President Moon Jae-in has vowed in his New Year’s speech to narrow the income gap between the rich and poor, and to provide a chance for low-income households to move up the ladder of socioeconomic mobility.

However, the gap has widened drastically due to the government’s failure to tame soaring housing prices. Those who listened to the government’s pledges to provide affordable homes and put off borrowing money to buy an apartment ended up being unable to afford one, while those who took out bank loans and purchased a home ended up profiting hugely as residential property prices rose to record highs across the country. This situation has left those who listened to the government being unable to afford a home, feeling deprived of the chance to bolster their wealth and climb the socioeconomic ladder. In fact, many people who listened to the government say they feel as if this ladder itself has crumbled.

One bank worker in Seoul, who wished to be identified only by his surname Ahn, bought an apartment in Yongsan district for slightly less than 900 million won ($772,000) five years ago when he got married. He used his savings and took out a mortgage, while his parents and parents-in-law funded the rest. The apartment is now valued at around 2 billion won and the young couple in their mid-30s have already amassed a sizable amount of assets.

On the other hand, the owner of a small repair shop in Changwon, South Gyeongsang Province, surnamed Han, lives in a rental apartment with his parents. The family has never owned a house and their assets haven’t increased much during the past few years. Now in his early 40s, Han hopes to purchase a new apartment with 100 million won that he has in his savings account, along with money his parents saved. But the amount is not enough.

“The gap between those who have assets and those who don’t has expanded dramatically. The gap has also widened among those who do have assets, depending on where they own property,” said Kim Jin-bang, a professor of economics at Inha University.

“In the past, a person could accumulate assets by saving their income, but now it has become almost impossible to make up for that gap through earned income or savings,” he said.

According to KB Kookmin Bank, the price income ratio (PIR) in Seoul rose to 17.4 in the first quarter of this year from 13.9 last year. This figure means that one needs to save their entire salary for 17.4 years without spending a dime in order to afford a house in Seoul. In a joint report submitted to the National Research Council for Economics, Humanities and Social Sciences under the Prime Minister, state-run think tanks define the administration’s real estate policy as a failure, pointing out that it worsened public distrust in government policy as residential property prices only skyrocketed, despite more than a dozen policies announced by the government to stabilize the real estate market.

One’s socioeconomic status is now determined by how much real estate one has, rather than how much one earns, and statistics show that it is becoming more difficult to climb up the socioeconomic ladder.

According to a report by LAB2050, a private think tank, those households in the top 2-percent bracket in terms of real estate assets owned on average 3.08 billion won ($2.63 million) worth of real estate as of March 2020. Eighty percent of these households live in the Seoul metropolitan area. However, at the bottom, 30% of households own no real estate at all.

The top 2 percent saw the value of their real estate assets increase by 555 million won during the past three years, thanks to skyrocketing housing prices. Between 2017 and 2020, those in the bottom 30 percent, meanwhile, saw their average real estate assets dip to zero from 9 million won.

There have been periods in the past when housing prices rose sharply, but it is different this time around because many people feel that their chances of climbing up the socioeconomic ladder have not only lessened but completely disappeared. Young people are pessimistic about future opportunities. The Seoul Institute surveyed 1,000 people between the ages of 20 and 39 and found that only 24.8 percent were positive when asked if they expect to be better off in terms of their socioeconomic status if they make an effort. Also, 87.2 percent of them said that Korea has become inequitable socioeconomically during the past 10 years, and 86.9 percent expected this inequality to get even worse over the next 10 years.

Policy failure to tame soaring home prices brings social mobility crisis

Left out of game from the start

Economists point out that people perceive asset inequities differently from disparities of earned income.

“When equal opportunity is guaranteed, a gap in earned incomes is generally accepted by society,” Lee Jin-hee, a senior researcher at the Korea Institute for International Economic Policy, noted in a report.

“In the case of assets, however, inequality can snowball through speculation, on top of inheritance. As those who had no assets to begin with didn’t even have an opportunity to participate in the game, it is difficult for them to accept this kind of inequality from the start.”

Professor Kim said that inequality in assets negatively affects the economy, while inequality in earned incomes can in some ways work positively.

“Instead of trying to improve their economic benefits through efforts to boost their earned incomes, people will only focus on ways of earning rental income through real estate speculation, expecting asset prices to rise. This situation ends up pulling down economic productivity.”

Lee Won-jae, trustee and CEO of Lab2050, noted that the gap in real estate asset prices can lead to disparities in the education of children. The top 2-percent bracket earned 20.35 million won in rental income each year on average, which means they have more money to spend on their children’s education. In fact, they spend four times more on education than those in the bottom 30 percent.

“Most of those in the top real estate bracket are highly educated people. They are increasing their real estate holdings faster than others, and they are investing more in the education of their children. In other words, both real estate and education are inherited. This situation is especially true among those in their 40s or 50s,” he points out.

Lee said that there used to be a belief among Koreans that everyone can earn income and buy a home under the same conditions.

“The possibility of moving up the socioeconomic ladder through savings and purchasing a home used to be a source of strong motivation for individuals, and it became a driving force of economic development as a result,” he said.

“Being able to purchase real estate, which was once a means to climb up the socioeconomic ladder, is now only widening the gap between classes and making that gap permanent,” Lee added.

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