[Diagnosis and Prescription] Real Estate Speculation, Rising Prices of All Goods, and Money: Problems, Causes, and Solutions

Table of Contents

I. Statement of the Problem

II. Rising Prices of All Goods: Theoretical Causes

1. Monetary Causes

2. Expectations Regarding the Purchasing Power of Money

3. Real Causes: Demand and Supply

4. Synthesis

III. Empirical Analysis (1): Rising Prices of Various Goods (Excluding Real Estate)

1. Rising Prices of Various Goods

2. Increases in Public Utility Charges or Administered Prices

3. Prices of Agricultural and Fishery Products

4. Technological Development and Prices

5. Prices of Imported Goods

IV. Empirical Analysis (2): Rising Real Estate Prices

1. The History of Rising Real Estate Prices

2. Causes of Rising Real Estate Prices

3. Government Real Estate Policy and Its Problems (1): Monetary Aspects

4. Government Real Estate Policy and Its Problems (2): Real Aspects

V. Solutions to Rising Prices of All Goods

1. Monetary Policy: Common Issues Affecting Real Estate and Other Goods

2. The Knowledge Problem and Keynesian Economics

3. Blaming Real Estate Speculation: Deceiving the Public

4. Abolition of Real Estate-Related Taxes, Quasi-Taxes, etc.

5. Abolition of Real Estate-Related Regulations

VI. Conclusion

References

I. Statement of the Problem

In some quarters of our society, there are alarming rumors that redenomination is imminent. Globally, heated debate is underway over Modern Monetary Theory. In one respect or another, the fact that money has attracted this much public attention is not without a positive side.

However, both phenomena reflect the public’s sense of crisis over the crisis of the modern economy—in the case of the United States, the 2008 economic crisis, which in turn became a global crisis, and in the case of Korea, the long-term collapse of money’s purchasing power—as well as the bizarre ideas of some experts. This is deeply troubling. What we should not be doing at this point is paying attention to redenomination, which has no practical benefit whatsoever, or to Modern Monetary Theory, which can hardly be called an economic theory. In Korea, matters far more important than these in relation to money are the long-term rise in the prices of all goods and the recurring real estate speculation. In other words, the problem is that the purchasing power of money has been falling continuously and rapidly over the long run.

The periods when the prices of all goods rose the most and the fastest were, in order, the U.S. military government period, the First Republic, and the Third Republic. However, considering that the aftermath of liberation or war was significant during the U.S. military government period and the First Republic, the period of peacetime in which the prices of all goods rose the most and the fastest was the Third Republic. Real estate prices were no exception. Even so, after that, the prices of all goods, especially real estate, continued to rise substantially and persistently. In 2017–2018 (and from 2016 in some major cities), real estate prices in parts of the Seoul metropolitan area rose sharply and continuously, prompting the government to move to curb real estate speculation and announce various measures.

Real estate in the Seoul metropolitan area has become so expensive that it has taken wage earners increasingly longer to buy it. Over the past four years (2015–2018), the average age of household heads who acquired their first home—whether by purchasing an existing house, subscribing to a new apartment offering, inheritance, or other means—was 43.3. In the case of home purchases, buyers paid for the house by borrowing 38% of the purchase price from financial institutions including banks. The fact that people, on average, bought homes at around age 43 by borrowing an amount equal to 38% of the home price is evidence of just how expensive housing has become. An apartment in Daechi-dong, Gangnam (less than 10 years old) costs more than 100 million won per pyeong. There is also unofficial survey evidence that people without sufficient funds are being pushed out of Seoul into Gyeonggi Province and spending an average of 3 to 4 hours a day commuting. This is important evidence showing that not only monetary policy but also current housing policy has serious problems.

However, this paper deals mainly with monetary policy and addresses housing policy only secondarily where necessary. This is because, as we shall see below, the most important reason why real estate prices have been high and have risen continuously over the long term is the large and sustained increase in the money supply. There have been cases in which a decline in the money supply caused an economic downturn and a slowdown in the rate of increase in real estate prices, or even a sharp fall in real estate prices. But since, in terms of importance, the former is far more significant than the latter, the latter will not be explained here. I note only that the latter can also be explained by applying the argument in this series in reverse.

Real estate differs from other goods in certain respects. It is a good that possesses both “direct use value” and “exchange value.” In particular, when a building is not old, its exchange value does not differ much from its direct use value. When a very old apartment is still extremely expensive, it is because its exchange value exceeds its direct use value. Automobiles also have both direct use value and exchange value, but as their direct use value declines, their exchange value declines proportionately as well. Real estate, however, is a special kind of good because both values decline much more slowly than in the case of automobiles, or because its exchange value is very large. Moreover, expectations regarding the purchasing power of money also play an important role in determining real estate prices, which is why real estate must be treated separately from other goods. This point is discussed below.

In addition to what has already been described, real estate (including stocks) differs from other goods in another respect: it is closely related to the business cycle. Real estate has the following “real estate cycle”: government policies to stimulate the real estate market (including policies to increase the money supply), a sustained and sharp rise in real estate prices (that is, the occurrence of real estate speculation) during the boom phase of the business cycle, government measures to curb real estate speculation, suppression of sustained and rapid increases in real estate prices (that is, suppression of real estate speculation, including policies to reduce the money supply), a slowdown in the real estate market during the recession phase of the business cycle, large-scale construction and supply of new housing through new town development and linkage with the construction of metropolitan rail networks, and repeated government policies to stimulate the real estate market. As noted above, some parts of this cycle are the result of business cycle fluctuations caused by increases (or decreases) in the money supply. There may also be exceptional cases in which the prices of real estate and stocks rise rapidly and persistently and then fall in succession without a business cycle occurring. This can be understood only through a detailed analysis of the process of monetary expansion.

Here, I summarize the pattern of the “real estate cycle” in stylized form. Depending on the policies the government implements and on people’s expectations, however, the real estate cycle described below may appear somewhat differently.

First, over a period of 3 to 5 years, real estate prices rise continuously and sharply. As prices approach a peak, a majority of ordinary people eventually join in real estate transactions in pursuit of capital gains. This is the phase commonly referred to as real estate speculation. It corresponds to the boom phase of the business cycle. Before real estate speculation occurs, the central bank lowers interest rates and increases the money supply.

Second, the government first begins propaganda and agitation claiming that real estate speculation is the main culprit behind the sharp rise in real estate prices. Then it pours out measures to curb real estate speculation. In some cases, it organizes joint task forces to crack down on real estate speculation—including officials from the National Tax Service—and inspects real estate agencies in areas judged to be overheated by speculation.

Third, in the next stage, the government raises various real estate-related taxes and strengthens various real estate-related regulations. At the same time, it restricts real estate-related lending or raises interest rates in order to contract the money supply. In some cases, the government carries out both loan restrictions and monetary contraction simultaneously; in others, it adopts only one of the two. This depends on the circumstances under which real estate speculation occurs and on whether the government can influence the central bank. As a result, the sharp rise in real estate prices is curbed, but the real estate market then falls to the bottom. The business cycle passes through crisis and enters the recession phase.

Fourth, based on the inference that real estate speculation occurs because supply is insufficient relative to demand, the government announces plans to build and supply large numbers of new homes through new town development. At the same time, it also announces plans to build metropolitan rail networks and how they will connect with other rail networks. In this way, the first- and second-generation new towns were built, and the construction of third-generation new towns is planned.

Fifth, although the rapid and sustained increase in real estate prices has been curbed, the business cycle has entered the recession phase, and the real estate market, as part of that cycle, falls into a severe slump or the slump deepens. Not long after implementing anti-speculation measures in the real estate market (typically 3 to 5 years, and in some cases 6 to 8 years), the government cannot help but adopt policies to stimulate the real estate market. In most cases, such stimulation measures are the reverse of anti-speculation measures. They include cuts or abolitions of various real estate-related taxes and the easing or removal of various real estate-related regulations. If these are judged insufficient, the government increases the money supply and relaxes regulations on real estate-related lending. The latter causes business cycle fluctuations, while the former, together with rising real estate prices, again stimulates the real estate market. In the business cycle caused by the latter, the boom phase is accompanied by sustained and substantial increases in the real estate and stock markets, while the subsequent crisis and recession phases are followed by crashes in those markets. After the 2008 international economic crisis, as interest rates rose and financial institution lending flowed mainly to consumers, the sustained and sharp rise in real estate prices in 2017–2018 came from real estate-related lending. This is not to claim that there was no business cycle after 2008. Rather, it means that its relative weight was smaller. Now, a rapid and sustained increase in real estate prices occurs again.

The process explained above is a real estate-related cycle, but it is also a result of changes in the money supply or financial regulation. Since the business cycle that includes the real estate-related cycle typically lasts about 10 years at the shortest and about 13 years at the longest, it is inevitably associated with two or three administrations. Therefore, the claim that the 2017–2018 real estate speculation was caused by the Lee Myung-bak and Park Geun-hye administrations is not incorrect. However, since industrialization, every administration has implemented either policies to stimulate or to suppress the real estate market depending on where the economy was in the business cycle. No administration ever cared what situation the next administration would face. In that sense, it would not be unreasonable to characterize Korea’s business cycle since 1960, including the real estate cycle, as a “political business cycle.”

What about the prices of goods other than real estate? For example, jajangmyeon, which cost 10 won in 1960, cost about 5,000 won in 2015. That is roughly a 500-fold increase in 55 years. Ramyeon, which cost 10 won in 1963, cost about 1,000 won in 2015. This means it rose about 100-fold over that period. Premium ramyeon, however, costs far more than 1,000 won.

According to data released by the Seoul Institute, the price of 40 kg of rice rose from 0.35 won in 1945 to 76,000 won in 2015, an increase of about 217,000 times over 70 years. Over the same period, the price of one movie ticket rose from 1.7 won to 9,000 won, an increase of about 5,300 times over 70 years. Cigarettes rose from 3 won to 4,500 won, and city bus fares from 0.50 won (base section) to 1,300 won, increasing by 1,500 times and 2,600 times, respectively, over 70 years.

Let us now summarize the questions this series seeks to answer. First, what role does money play in determining the prices of all goods? As long as the modern economy is an economy of “indirect exchange” that uses a medium of exchange, it is obvious that money plays some role in determining the prices of goods. However, the neoclassical synthesis, which is mainstream economics, has failed to show theoretically what role money plays in the pricing of goods. Here, by applying Austrian economic theory, I will explain what role money plays in determining the prices of all goods.

Second, although real estate is a kind of good, there is one respect in which the determination of its price differs from that of other goods: expectations regarding the purchasing power of money. In a narrower sense, this is equivalent to expectations regarding real estate prices. These expectations are closely related to rising real estate prices, especially real estate speculation. If one wishes to curb real estate speculation, one must understand, broadly speaking, expectations regarding the purchasing power of money and, more narrowly, expectations regarding real estate prices.

Third, sustained and rapid fluctuations in real estate prices, stock prices, and the like are part of the business cycle. Therefore, we must address the relationship between increases in the money supply and the business cycle, and on that basis understand and explain the phenomenon of surging real estate prices.

Fourth, every time real estate speculation has occurred, the government has presented and implemented similar countermeasures. This series analyzes the problems with the government’s policies to curb real estate speculation. It will also analyze methods for stabilizing the prices of all goods. Going one step further would mean identifying what constitutes a sound monetary system and financial system, and what monetary and financial policies follow from them. However, addressing all of that lies beyond the scope of this work. Here, only the minimum necessary will be covered, along with a brief introduction to some references.

Fifth, raising or introducing various real estate-related taxes in order to curb real estate speculation is based on the theory or belief that land is a source of unearned income. We call those who believe in this theory or belief Georgists. However, contrary to the Georgist claim, land and landowners perform productive functions in the economy. Therefore, increases in or introduction of various real estate-related taxes have had various negative effects on the economy rather than curbing real estate speculation.

Real estate speculation is a major cause of income inequality. However, the Georgist claim that real estate speculation arises because of unearned income is incorrect. Since real estate speculation is the result of monetary expansion, if one wishes to restrain or eliminate income inequality caused by real estate speculation, it is necessary to reform the monetary and financial policies that determine the money supply and, more fundamentally, the monetary and financial systems themselves.

Finally, as shown in

, from the mid-1960s through 2018, the average land price nationwide rose every year except 1993 and 1998. Only the annual rate of increase differed from year to year. The same is largely true of all goods other than real estate. Therefore, this series deals only with increases in the prices of all goods, treating declines (or moderate increases) only as exceptions. However, declines in the prices of all goods can also be fully explained by applying the theory presented below. With that in mind, the theory in Section II is structured so that phenomena related to price declines can also be explained.

*For the full text, see the attached PDF file.

Wiki:

https://www.cfe.org/w/bbsDetail.php?&idx=34

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Original title: [진단과 처방]부동산 투기와 모든 재화의 가격 상승, 그리고 화폐: 문제, 원인 그리고 해법

Author: Yong-deok Jeon

Date: 2019-07-29

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=report&pn=2&idx=20354