Government-made chaos in asset markets

Koh Hyun-kohn

The author is the chief editorial writer at the JoongAng Ilbo. 

The 1997 Asian financial crisis and 2008 global financial crisis were unprecedented shocks, but asset markets still moved with some sense of order. Stocks and home prices plunged, then rebounded as the crises passed. Today’s market is more dizzying.

The core problem is liquidity. Too much money has been released into the economy. As the real economy recovered faster than expected thanks to AI, the government introduced a supplementary budget to stimulate growth. It moved in the wrong direction; policy should have shifted toward stabilization.

The government also does not seem inclined to tighten its purse strings. President Lee Jae Myung has derided those who “sing the song of austerity constantly” as “strange.” He similarly dismissed concerns that debt forgiveness could encourage moral hazards as “irresponsible agitation.” That language reduces complex issues to “right” and “wrong” rather than listening to criticism.

Monetary tightening also came late. Despite signs of overheating, the Bank of Korea did not pivot to higher rates until last month. Did it hesitate ahead of the June 3 local elections? Meanwhile, excess liquidity poured into stocks and property. Rising share prices, home prices, inflation and the exchange rate were fueled by abundant money. The subsequent stock decline reflected how far and quickly prices had risen.

Some in the ruling camp now say Lee promised only a Kospi of 5,000, implying that once the pledge was fulfilled, what followed was no longer the government’s responsibility. But the government encouraged the market and told people to sell homes and buy stocks. When the Kospi surged toward 8,000 this spring, Deputy Prime Minister and Finance Minister Koo Yun-cheol said it was “still low.” The National Pension Service was enlisted to support the market. There was no warning about leverage or overheating.

All this happened before the local elections. Leveraged single-stock exchange-traded funds, blamed for worsening volatility, were introduced in May with presidential office backing.

Korea’s stock market has become a casino mocked abroad. Investors are exhausted. The government has belatedly announced leverage measures and warned against debt-financed investing. The bigger mistake was framing stocks as the government’s report card. Markets cannot rise forever. By claiming credit for gains, the government invited blame for losses.

The housing bubble has the same root, with too much money chasing too few homes. Early in his term, Lee said that the government had ample tools to restrain demand and expand supply. Instead, it returned to the familiar playbook of the Roh Moo-hyun and Moon Jae-in administrations: tighter lending and higher taxes. It broke its pledge not to use taxes to control housing, then faced backlash after moving to raise burdens even on single-home owners unrelated to speculation.

Punitive taxes on expensive homes may provide emotional satisfaction, but they amount to political division. Similar policies failed under previous governments.

Last month’s real estate debate led by Lee appeared designed to build support for higher holding and transaction taxes. For three hours, discussion centered on buying and selling. Solutions for young people and those without homes were largely absent. One participant noted that there were virtually no jeonse (lump-sum deposit) or monthly rentals available. Lee offered little response.

The average jeonse price in Seoul has exceeded 700 million won ($493,400). As recent tax changes encourage more owners to occupy their homes, the rental supply is shrinking. Landlords may also pass higher holding taxes to tenants. Renters could bear the greatest burden.

The obvious solution is to tighten liquidity and increase housing supply. But projects planned for the Yongsan International Business District, the Gwacheon horse racing track and Taereung country club have made little progress for more than six months.

Land Minister Kim Yoon-duk recently said that he had developed a desire to build homes “even if it means releasing greenbelt land.” Why has the minister responsible for housing realized this now?

The episode recalls former Land Minister Kim Hyun-mee’s remark during the Moon administration that if apartments were bread, she would bake them through the night. The comment aggravated people already suffering from soaring housing costs.

Policy has lost credibility, and asset markets have fallen into confusion. The government underestimated the market and paid the price. The arrogant belief that the government can defeat the market has produced exactly this outcome.