[The Editors' Verdict] COVID-19 and Changes in Asset Prices

At the end of last year, the novel coronavirus infection (COVID-19) began to resurge worldwide with a time lag. South Korea experienced COVID-19 earlier than others and is considered one of the countries that focused heavily on quarantine measures. This year, its economic growth rate is holding up relatively well among the Organization for Economic Cooperation and Development (OECD) countries. However, the economic growth rate for next year does not look very high.

These days, perceived economic conditions and perceived unemployment seem to move separately from actual economic and unemployment statistics. Many stores with "For Rent" signs are seen here and there, and their numbers are increasing. Self-employed individuals are reducing employment to cut costs even by a penny. Office workers at companies are walking on thin ice, and the actual employment rate of university graduates is much more serious than people think. However, there is a reason why this is not felt on the surface. It is the change in asset prices.

The era when labor could catch up with asset prices has changed. Housing prices in most cities, including Seoul, have more than doubled since the current government took office. Owning a house by earning wages through labor has become almost impossible. The value of money drops dramatically when it comes to housing or real estate. This is because there is a shortage of supply in places where people need to live and go to work or school.

Considering the time it takes to build houses, the supply volume in major cities will continue to decrease within two years. Of course, supply can be increased in various ways. Benefits for rental business operators should be reduced to increase supply, and reconstruction and redevelopment should be expanded. Taxation on owning two houses per household should continue to be strengthened as it is now.

So, are real estate asset prices a bubble? The answer is that they are close to a bubble. Compared to the domestic economic growth rate over the past 10 years, housing prices in major cities have risen several times more. Japan experienced a real estate bubble from 1985 for five years, followed by a crash over six years after 1990. At that time, the ratio of mortgage loans was high, and the bubble burst as interest rates rose.

What about other asset prices? As of the end of last month, even amid the resurgence of COVID-19, the Dow Jones, S&P 500, Korea Composite Stock Price Index (KOSPI), and Japan's Nikkei index all reached record highs. Uncertainty has been resolved due to news of vaccine development, breaking records. In South Korea, when the stock market crashed in March due to COVID-19, so-called savvy retail investors boldly entered the market and became a driving force in raising stock indices.

Then, is the domestic stock market a bubble? The answer is "No." While the economic growth rate over the past 10 years is about 45%, the stock index has only slightly increased from the 2400 level 10 years ago. Statistically, there is room for further growth. Especially, people in their 20s to 40s, who cannot buy houses with their salaries and loans, are entering the stock market. For these young people, conditions are created that could change the structure of financial assets in the future.

Many people also ask about virtual currencies. Are virtual currencies a bubble? Prices are rising due to expectations of institutional adoption, but it is merely taxation on income. The underlying asset of virtual currencies is blockchain. Therefore, one must understand the value of blockchain and judge how much that value is. The value of money lies in its fundamental functions as a medium of exchange, a measure of value, and its derivative functions as a store of value, a means of payment, and a standard of deferred payment. From these perspectives, virtual currencies are difficult to consider as money.

COVID-19 has changed our lives significantly. It has changed everything from lifestyles to the direction of asset prices. This phenomenon will inevitably deepen as we move to younger generations.

Kim Sang-bong, Professor of Economics, Hansung University