[Insight & Opinion] Real Estate Captive Society and Shareholder Return Ratio

Real estate accounts for an overwhelming proportion of household assets in Korea. Although the figures vary depending on the research institution, the proportion ranges from the low 60% to the high 70% range. Compared to other countries, this figure is even more striking. The United States and Japan stand at around 20% and the high 30% range respectively, which is less than half of Korea's.

Even without discussing the composition of household assets, there is no doubt about the socio-economic weight that real estate holds in Korean society. This reality has led to the expression "Real Estate Captive Society." Some experts attribute the high proportion of real estate to Korea's unique characteristics such as limited land area, rapid economic development, and income growth.

What is clear is that an excessively high proportion of real estate reduces households' ability to respond to crises and makes it difficult to secure cash flow in old age. Historical experience also shows that real estate bubbles are more painful than financial bubbles. In the case of a stock bubble, in extreme cases, only shareholders suffer losses. However, if the real estate market collapses, the banking system that lent money breaks down, resulting in catastrophic consequences for the financial system. When the financial vessels through which money flows are blocked or burst, a crisis hits the social system. These concerns have been consistently raised for over 20 years. Yet, nothing has changed. On the contrary, the almost religious faith in apartments in some parts of Seoul seems to have strengthened. It is also not feasible to forcibly implement policies to reduce the proportion of real estate. Investment is a personal judgment based on expected returns, so individuals cannot be penalized for having a high proportion of real estate.

One thing to consider is raising the expected returns of other assets that compete with real estate. For example, if the expected return on stocks is high, the perception that retirement funds should be prepared through long-term stock investment, as in the United States, will spread. Americans' retirement funds are captive to stocks rather than real estate. This is why there is a strong incentive to quickly lower interest rates when stock prices fall.

A decline in stock prices means a reduction in the retirement funds of the entire population, so what politician would dare to implement policies unfriendly to the stock market? When thinking about expected stock returns, people usually think of capital gains. However, in the United States, about 40% of long-term stock investment returns can be explained by dividends. Is this the case in Korea? It does not seem so. The shareholder return ratio (the proportion of profits paid out as dividends and share buybacks) in the U.S. is as high as 90%, the highest level in the world. Korea ranks near the bottom among OECD countries, with less than 30%. Considering the OECD average return ratio is 70%, Korean stock investors must focus their investments on capital gains rather than on stock value increases from dividends or share buybacks.

If Korean companies increase their shareholder return ratio, increase the frequency of dividends so that quarterly dividends become common, and provide tax benefits to long-term investors, how would Korean investors think about stocks? Probably, more investors would hold stocks longer and prepare for retirement by receiving dividends than they do now.

A household structure excessively concentrated in real estate entails high costs. In the event of an extreme crisis, liquidity problems may also arise. To reduce the negative impact of a high real estate proportion, it would be meaningful to socially consider incentives that can resolve the Korea discount.

Sang-geon Lee, Head of Mirae Asset Investment and Pension Center