While the U.S.-China trade war is hitting South Korea's economic growth, President Moon Jae-in's biggest problem is at home: the country's soaring housing market and all the risks that a bubble in the sector brings.
On January 14, Moon said his government will act "endlessly" to calm the housing market. That includes new taxes, limits on mortgage lending and safeguards against speculators hoarding multiple properties. But execution has not been Moon's strong suit these last three years and he will need to overturn decades of Korean policy-making to do so.
Between 2013 and 2017, President Park Geun-hye made it easier to get mortgages. Cutting red tape enthused borrowing for Seoul's real estate sector, which was already experiencing supply shortages. The market rose more than 6.2% in 2018 alone, pushing home prices in Seoul to 24 times average annual salaries, or about $560,000.
By the time Moon took office in 2017, Korean media was abuzz with reports that Seoul housing costs had topped Tokyo and were approaching New York levels. Household debt -- including mortgages -- stood at $1.34 trillion as of late November, nearly comparable to Korea's $1.6 trillion of annual output, having risen from less than $600 billion in 2009.
It falls to Moon to change the situation. There is not a moment to waste; even Financial Services Commission Chairman Eun Sung-soo said housing is "surely a bubble." On December 17, Eun said: "I am not saying prices will surely collapse. But I, as the FSC chairman, need to be prepared."
Seoul's challenge is not unique. How Asia's fourth-largest economy pulls off this balancing act, or fails to, will be of great interest to policymakers from Hong Kong to Sydney to Washington. The problem of house prices outpacing incomes is a global one -- yet Korea risks becoming an extreme case.
There is, after all, a pyramid scheme dynamic at play as Korea enters 2020. Just as in developing Asia in the late 1990s and in U.S. housing circles in 2008, a mindset which says that prices can only go up is pushing them higher even as economic prospects darken.
Korea's economy is expected to grow 2.4% in 2020, a touch below an earlier government estimate of 2.6%. Yet this pace relies on the U.S.-China trade war winding down, a dubious assumption given President Donald Trump's erratic behavior. It assumes, too, that Moon and officials at the Bank of Korea manage to cool housing prices without derailing growth.
On Moon's watch, prices in Seoul's trendy Gangnam neighborhood have jumped 20%. Expectations have not been checked by his 2018 move to hike taxes on those owning more than one house. In a Korean Development Institute survey from November, 62% of real estate professionals expected Seoul flat prices to rise this year.
Frothy asset markets make it unlikely the BOK will be adding much new liquidity. In October, Governor Lee Ju-yeol's team cut benchmark interest rates for a second time in three months -- to a record low 1.25%. Another cut would be a signal to speculators to borrow heavily.
In December, Moon's government targeted properties worth more than about $1.3 million with a mortgage-lending ban. It also tightened mortgage rules more broadly. Yet this amounts to tinkering, not assertive action.
Why has Moon been reluctant to act forcefully? With approval ratings below 50%, he may be worried he will be blamed for falling property values. Yet his legacy will sustain even bigger blows if this pyramid scheme dynamic is enabled or even encouraged.
Korea's bubble troubles are best handled the "macroprudential," or top-down, way. That requires innovative steps to limit, say, loan-to-home-value ratios or to put caps on debt relative to income. Next could come outright bans on second homes or, at the very least, prohibitive taxes on speculative buying. More creative affordable housing safety nets are needed for lower-income families.
Moon's team wants caps on presale prices for new apartment complexes in the glitziest neighborhoods from Seoul to Busan. That is fine, so long as limits have teeth. Moon also is under pressure to force government officials who own two homes to sell one.
Earlier this week, Moon said: "Unlike previous administrations, we won't use real estate as a means of stimulating the economy." Yet the bigger risk is that his government lets this bubble get away from it, preferring tweaks over bold action. A bull market in complacency means a bear market in everything else.
William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."