New Government, New Direction: Where Are Real Estate and Stocks Headed?
With a new president in office, I've been thinking about how real estate and the stock market will change. My initial take: both will rise.
Early Days of Regime Change: Expectations Move Markets
Looking at historical stock market trends during regime changes, the KOSPI rose 7.71% and KOSDAQ 6.21% in the first 5 trading days after the Lee Jae-myung administration took office, significantly outperforming early returns of previous administrations.
It's typical for markets to rise for the first month or two on expectations when governments change. This president, however, appears to have real experience and knowledge in real estate and stocks, suggesting a deliberate policy design.
The New Government's Real Estate Strategy: Free Market Economy
The new administration doesn't appear inclined to force housing prices down with heavy-handed policies. The stance is to leave it to the free market.
My theory (unsubstantiated) is that capital has flowed into real estate because large-scale investors found it the most favorable asset class in Korea when factoring in taxes and operating costs.
Strategy One: Supply Expansion
They will build a lot of housing. Supply and demand is the foundation of capitalism. By increasing supply to match demand, they can at least prevent runaway price surges.
Experts also expect supply expansion policies. Analysts note that the Lee administration's real estate platform emphasizes "supply expansion," a different stance from the previous government's tax-focused approach.
The Real Game-Changer: Stock Market Reform Through Commercial Law
Strategy Two: Making the Stock Market Attractive
What if commercial law reform enabled large-scale investors to generate better returns or steady cash flow from stocks and bonds than from real estate? Capital wouldn't flow exclusively into real estate, helping cool housing prices while boosting the undervalued stock market.
It could also transform a market where foreigners day-trade into a genuine investment market.
Challenges Facing Commercial Law Reform
For this to work, the reform must succeed. The current problems are numerous:
- Companies hoarding cash instead of paying dividends
- Korean corporate dividend payout ratio ranks 16th, below Turkey
- According to Korea Economic Daily, cash dividends among listed companies grew from 15 trillion to 41 trillion won over 10 years, but the top 20 companies account for 65% of total dividends. Korean companies' free float ratio (60.6%) is far below the US (95%) and UK (93.9%), with controlling-shareholder structures blocking dividend expansion.
- Shareholder value destruction through corporate spin-offs and subsidiary IPOs
- Prevention and strict punishment of executive embezzlement and breach of fiduciary duty
- Naked short selling issues
All of these must be addressed before both real estate and stocks can be set right.
Everything hinges on commercial law reform.
Why Dividend Policy Will Be Central
Housing can be built and sold within 2-3 years, but commercial law reform requires overhauling countless regulations and policies, no easy task. If it stalls in the National Assembly, the situation becomes even more dire.
If more taxes and more restrictions drive wealthy investors away from stocks again, capital will inevitably flow back to the US market.
The US Success Story on Dividends
Looking at US dividend policy, the US stock market has many shareholder-friendly companies, with quarterly dividend policies enabling investors to generate steady cash flow like rental income. According to KB Securities, the S&P 500's dividend payout ratio over the past decade was 39%, significantly higher than Korea's KOSPI market at 22%.
I believe the US market attracts and retains foreign investment precisely because of its dividend-centric policies.
Korea's Progress on Dividend Reform
The government recognizes this. According to the Financial Services Commission's dividend reform plan, they expect that stimulating dividend investment will lead companies to increase dividends, creating a virtuous cycle of long-term investment driven by dividend income in Korea's capital market.
Don't Miss This Golden Opportunity
With the US experiencing turmoil over foreign dividend taxes and other issues, this could be (unsubstantiated) a golden opportunity for Korea to attract foreign capital.
Conclusion: Dividends Are the Answer
I believe dividends must be the core focus of this commercial law reform.
The business community agrees. The Korea Chamber of Commerce stated that "the National Assembly's proposed commercial law reform will only increase legal uncertainty for directors, leading to lawsuit abuse, investment shrinkage, and innovation hindrance," and advocated instead for "tax reforms to expand shareholder dividends as a path to value-up."
How attractive dividends become through this commercial law reform will be the defining challenge.