As the government prepares a supplementary budget worth 30.5 trillion won, there are concerns about a further rise in housing prices. Some believe that the increased liquidity will ultimately flow into real estate. In this regard, a report from the Korea Development Institute (KDI) released five years ago during the COVID-19 pandemic is drawing attention.
According to a report published by KDI on Dec. 22, 2020, titled "The Impact of Increased Currency Supply and the COVID-19 Economic Crisis," the government's supplementary budget preparation was analyzed as leading to an increase in real estate prices.
The report noted, "When the currency supply increases by 1.0%, housing prices tend to rise by about 0.9% over the course of a year," adding that "the effects of increased currency supply can manifest as short-term increases in housing prices."
However, the current rise in housing prices, particularly in Seoul, reflects expectations of future liquidity increases due to interest rate cuts and the supplementary budget, rather than liquidity itself. It is believed that as liquidity increases, it will eventually flow into real estate. According to the Bank of Korea, as of the end of March, the average amount of broad money (M2) was 4,227.8 trillion won, a 0.1% decrease from the previous month. M2 refers to the total liquidity including cash, demand deposits, and time deposits.
A decrease in currency supply compared to the previous month is an unusual phenomenon. The currency supply typically leads to an increase in housing prices with a time lag, and viewing the currency supply itself indicates that the current increase in housing prices is not solely due to abundant liquidity. However, if the supplementary budget is executed and additional interest rate cuts are implemented, it cannot be ruled out that M2 may increase sharply.
KDI also previously released a report stating that the effect of disaster relief funds leading to increased sales for self-employed individuals and small businesses was minimal. According to the report titled "The Effects and Implications of the First Emergency Disaster Relief Fund Policy," after the government provided the first disaster relief funds at that time, the increase in sales compared to the overall input budget in eligible sectors was between 26.2% and 36.1%. KDI estimated that the remaining 63.9% to 73.8% was used for savings or other purposes such as real estate and stock investments.
Jung Dae-hee, head of the macroeconomic and financial policy research department at KDI, analyzed the impact of the supplementary budget on real estate prices from five years ago, stating, "The current rapid increase in housing prices is affected by short-term factors such as expectations following the change of government," and added, "Considering the scale of the supplementary budget and the economic recession, it seems unlikely that we will see an increase in liquidity as strong as during the COVID-19 period."
Meanwhile, the government is set to submit the supplementary budget plan to the National Assembly on the 23rd. Taking into account the examination procedures of each standing committee and the Special Committee on Budget & Accounts, it is expected that the bill may be processed in a plenary session as early as next month. A total of 13.2 trillion won (10.3 trillion won from the national budget and 2.9 trillion won from local government funds) will support "universal consumption coupons." The funding will be distributed in two phases, with each person receiving between 150,000 won and 500,000 won. An additional budget of 600 billion won has been allocated for local love gift certificates. The project to revitalize the construction industry will receive an investment of 2.7 trillion won. Additionally, 400 billion won is expected to be utilized for personal debt relief.