A Midsummer Night's Grumble, 2013

On a summer night in the middle of a heat wave, members of the women's association of an apartment building are sitting around a table outside and chatting. At first, cookies, fruit, and drinks are laid out. Soon instant cup noodles appear. It will not be a short session.

"The government seemed pretty determined on April 1st. But, even their measure to boost apartment prices isn't doing anything. They are saying it looked like the prices were budging a little, and the market was becoming more active. But pretty soon everything sank back to before."

"You're right. I guess what people are saying is right; apartments aren't going to be good investments anymore."

"What am I going to do? I made my children drop two after-school classes because I have to make the interest repayment..."

"Selling at a bargain price now is not an option. We can only sit back and hope that the prices will go up again."

There is more grumbling. Someone continues.

"Forget it. There's no hope any more. The prices for jeonse are skyrocketing but no one's buying or selling. It's because buyers are sending a clear message that they will wait until prices drop more."¹

"I think we have done all we can. All members of the association agreed not to sell the apartments below a certain price. We've even chased the real estate agent out from the neighborhood who opposed us and tried to make deals at lower prices."

"I remember. I still clearly remember all the criticism in the media. Everything went down the drain."

Another woman who had been quiet says, "Well, whatever they say, an apartment is an apartment. We have to hold on no matter what and not sell at low prices for whatever reason. I'm sure one day that will do us good for sure. In a country like this, the amount of land is so limited and there are so many people. How can apartment prices not go up? It's those who are getting out and selling at bargain prices that are public enemies."

"Who would've wanted to sell for less? They were probably stuck in a tight situation."

"Who's right and who's wrong here? Has it not been, indeed, the well-chosen investment in apartments in the right areas that have yielded a profit many times over the annual salary of any decent employment?”

For about the last 40 years, apartments have been considered a sure cash cow in multiplying assets, the so-called wealth effect in economics. With the prices of apartments skyrocketing, the size of ordinary people's spending grew. "Let me put that on my credit card. I can pay back the loan all at once when I sell my apartment later."

The discontent with the relative deprivation on the renters’ side grew even deeper. At long last, they also opened their wallets. It was a spending out of despair.

The national economy was going fine. A national spending spree. Not only the haves, but also the have-nots, all stepped forward as agents of consumption. The warning from a minority, that this kind of "spending on the brink" can jeopardize the future of the country, was buried in silence. Even after the terrible experience of the 1997 Asian financial crisis, we remained ambivalent.

The indifferent passing of time brings us to that night during the summer of 2013. The people of the women's association of the apartment building gathered and lamented. What should they do? They can talk on all night long until they are blue in the face, but they cannot come up with an answer. The current selling price is 20 to 30 percent less than what it was at its highest. They wondered, then will the price go up if I just hold on to it?

Only the wind would know the answer; it is more frustrating on a windless day like today. It is late into the night. The women get up off their seats and head home. Who was it that said that apartment buildings are concrete cabinets that isolate people from the outside? Of course, no matter what happens inside, no one from the outside will know.

Rather, apartment buildings became more attractive because they are a closed space. The desire and intention was to be off-limits to the nearby villages and other apartment complexes. Therefore, apartment buildings were referred to as gated communities bolted shut. Although, generally speaking, a human being ought to live in a space open to the outside world, such was the state of our apartment buildings.

After the women leave, the crumbs and the ripped bags from cookies and instant cup noodles half-filled with leftover broth are left lying around. Late into the night, the old security guard on his last round picks up the garbage, dragging his body already tired with all the running-around he had to do during the day for all sorts of requests from the residents. Unlike before, nowadays is it not true that just dealing with package deliveries—receiving them, recording them, and calling each apartment to have people come and pick them up—puts him in a state of mental exhaustion?
 

The Myth of the Eternal Winning Streak of Apartments Is Over

Nothing but apartment buildings. Even looking around in every direction, it is impossible to find scenery devoid of the towers of apartment buildings. South Korea has become a republic of apartment buildings. The assessment that the country was pulled up off the ground by apartments and is suffering because of them is probably not a great exaggeration.

Let us leave the buildings constructed in the center of Seoul during the period of Japanese occupation: Toyota Apartments and Naeja Apartments. The first apartment complex constructed by our own hands was the Jongam Apartments of 1959. Later, in 1964, the Mapo Apartments, a luxury building by the standard of that time, was constructed. However, people considered apartment buildings housing for the poor and shied away from them.

People live above people; people live below as well. Apartments were a thing of mystery for the traditional way of thinking. People were afraid of carbon monoxide poisoning—understandable given the method of heating with coal briguettes at the time.

At the time, Seoul was more than a full house with people moving in from the countryside without any plans. They just built illegal plywood shacks high up on the hillside, finding unoccupied spaces. In the order of arrival, they went higher and higher up toward the top, and the new appearance of Seoul became one that didn’t befit a nation's capital. Out of desperation, public housing project apartments were created. They were constructed recklessly, and in the early spring of 1970, even resulted in the collapse of a building. In the concrete piles of the crumbled Wau apartments, the lives of 33 residents were lost.

As real estate development in the Gangnam area of Seoul made progress, the construction of apartment buildings sped up. However, apartment buildings were still unpopular. Construction companies were busy covering costs by selling apartments at low prices; the ones with better cash flow waited for further opportunities while using their buildings as workers’ dormitories.

However, the apartments were silently changing our lifestyle. A revolution in modus vivendi. Our mothers and sisters whose backs were hunched over in traditional kitchens worked standing upright in modern kitchens. The central heating system prompted the complete removal of coal briquette heaters. The skin on the hands and faces of children as well as adults started showing the color of a better life.

More and more, the number of people rushing to sell their houses to move to apartment buildings increased. Of course the people on the other side belittled such behavior as vulgar.

Then came the explosion in the 80s. The big bang of the universe of apartments opened up. Crowds of onlookers flocked to show houses and a sea of people flooded the allotment offices when new apartments became available for purchase. The prices of apartments went up overnight, and people became ecstatic with dreams of making a fortune. It was not at all uncommon for some people to move into an apartment and live only for a short period of time without even unpacking, until they bought a new apartment to move into. The so-called era of apartment speculation frenzy began.

This phenomenon continued for well over 25 years, and similar scenes were replayed until the mid-2000s. Banks issued loans without question as long as it was for an apartment purchase. Here we are talking about none other than financial institutions, the very definition of fussiness. This was an apartment mortgage loan, and it was difficult for banks to find a more secure business. At this point, regardless of what anyone might have said, Korea was precisely a republic of apartments.

This is the point when jeonse, the rental-on-security-deposit system particular to South Korea, takes the stage. Foreigners that returned to their home countries after living in Korea at the time murmured to themselves as they were returned the entire security deposit, having paid no rental fee at all, "I just cannot understand. What is this jeonse, system of South Korea that enabled us to rent on practically nothing?"

Landlords said, "No" when they were asked to rent their places for a monthly fee. Instead, landlords wanted tenants who would take the rental-on-security-deposit that would let them control over a lump sum of money. Those who are sharp may already have understood the logic. Landlords added a little more money to the received lump sum and bought more smaller apartments. Without exception, the price of those apartments skyrocketed. When the contract ended and the owners were to return the deposit, the landlords sold the newly acquired apartment in order to make the amount of the deposit. Even then, handsome profits were made.

It was an archetypal win-win game. The renter is fully content that he rented on nothing as the entire amount of the deposit is returned to him; the problem was that the rich got richer and the poor got poorer. Some even went so far as to say that the country was going to collapse because of apartments.

President Roh Moo-hyun's administration ambitiously made this its battle. From the beginning of his term, countless policies were issued with the intention of easing the suffering of the lower income class. However the outcome was always the opposite. It became so bad that at one point the government coined the term "seven bubbles." They had to expand the special zone subjected to the governmental monitoring of rising apartment prices.

One day towards the end of his five-year term, President Roh Moo-hyun said the following: "Aside from apartments, I have done all right." His self-assessment was that although his administration put forth more effort in stabilizing the apartment prices than any previous administration, he suffered a failure in this area. Thus, apartments continued their myth of the eternal winning streak, never resulting in any losses.

Why Does the Image of Occupy Wall Street Resonate?

A significant number of countries in the world are suffering because of apartments (or other real estate properties such as single family homes). The economy, which had been doing fairly well, was now cornered between the cycle of skyrocketing and plummeting apartments prices. Borrowing from President Clinton's winning slogan in 1992, "It's the economy, stupid," I hear myself uttering, "It's the apartment, stupid!"

The root of the current economic difficulty is the U.S. subprime mortgage crisis in 2008. For four or five preceding years, investment banks had started focusing on lending to individuals and corporations for the purpose of real estate acquisition. When this led to a decent profit, the financial sector was quick to extend its focus to lending to lower income classes with less than prime credit histories, with apartments and houses as collateral.

Starting from 2007, there were signs of falling real estate prices. Quickly, many had problems with loan repayments. This, in turn, caused prices to fall even faster. Many ended up defaulting on their loans; all fell into a downward spiral that became a crisis. This is the core of the subprime mortgage loan crisis.

In essence this was not very different from the economic crises of Spain and Italy that affected the entire world economy during 2011-2012. Moreover, Japan entered another tunnel of recession, as their apartment bubble had collapsed long before. The lost decade of Japan that began in 1991 has seen no end in sight even after over 20 years.

In China as well, there have been waves of real estate investments on speculation centered around Shanghai, Beijing, and Tianjin during the past 20 years. What is different in this case is the learning effect. With every given opportunity, the Chinese government has expressed its determination not to repeat the mistakes of countries such as the U.S. and Japan, and has followed up with regulatory policies.

Currently, what is attracting most attention is Likonomics, which contains the direction of the economic policy of China in recent years. This is significant in that it is the economic policy of Premier Li Keqiang and that at its core, it entertains the possibility of lowering the bottom line of the rate of growth if need be while focusing on economic reformation and restructuring instead of stimulus. As a result, the probability of a real estate bubble seems to be decreasing.

What about South Korea? South Korea seems to be facing a time of considerable tribulation, having been unable to avoid what economists calls path dependency. People who overextended their investments through loans on collateral are the house poor, in no better position than a beggar with a house. They saw the process of an overheating market and the formation of a bubble, and were able to clearly foresee the eventuality but could not choose another path.

Originally, a house is one's living space. Insofar as apartments are concerned, we need to return to this basic. We must turn it back around from a means of increasing assets to a space for living. We are faced with the situation where the bubble must be removed and restructuring is the only option.

I cannot forget the image of Occupy Wall Street that started in Zucotti Park on Wall Street, the financial district in Manhattan, New York. It was a criticism and revolt against the losing game that highly trained financial experts played on real estate assets. The greed of the one percent can force the global community into another crisis again any time. The time has come for all those who would like to create wealth from apartments to listen carefully to the wishes and warnings of the "occupy" protesters.

1. translator’s note: Jeonse, a rental-on-security-deposit, is a rental system particular to South Korea. The renter gives a large sum of money, at times close to the value of the property, to the owner who returns the same amount to the renter at the end of the lease. A more detailed explanation comes later in the article.