Dissonance between Formal and Informal Housing Capital: The Case of Korea

This dissertation research develops a new way to analyze the evolving dynamics of wealth concentration in the Global South, where indigenous norms and institutions play a crucial role in accumulating wealth. The research particularly posits the Chonsei system as non-institutional, unregulated and informal housing capital that is invaluable for building wealth in Korea. By shedding new light on such peculiarity, this research develops a model that better explains growing inequality in that country and ties it to structural changes resulting from greater financial globalization. The research develops this approach through three separate research programs that together analyze the emerging dissonance between formal and informal housing capital in recent decades. These research programs clearly situate the evolving dynamics of wealth concentration by applying agent-based research approaches such as a microfoundational framework and a model of portfolio choice within conceptual frameworks based upon historical and structural contexts in Korea. The first research program examines the development of the Korean housing finance system. Its unique development path can be characterized as the history of challenges, which refer to forces that have hindered the accumulation of wealth, and responses, which refer to counteractions that seek alternative modes of wealth accumulation. This overarching characterization consequently allows the following research programs to situate inequalities in wealth that are set in motion through the chronic tension between formal and informal housing capital. The second research program examines why and how there has been the radical debt shift from corporate to consumer holdings in Korea over the past decade. Within strict Loan-to-Value (LTV) limits, banks are willing to approve mortgage loans unless borrowers fail to secure a down payment since lenders have a larger cushion against losses in cases of default. At the same time, despite the strict regulatory environment, unregulated housing credit such as Chonsei typically allows borrowers to relax their down payment requirements. As a result, even strict LTV prudential limits will have limited power to control the increasing debt dependency of households as long as the unregulated credit can easily be accessed. I test this proposition through an empirical analysis of the Korean housing finance system using a panel instrumental variables regression approach. The empirical results indicate that over the past decade there has been the explosive growth in residential mortgage lending despite the strict macroprudential limits, as banks can transfer their business risks that would normally be hedged in the financial market onto the space market where the Chonsei system operates. The third research program examines how such radical debt shift has constructed barriers for household wealth accumulation. This study particularly focuses on investigating the degree to which households’ vulnerability to risk and uncertainty can be differentiated according to the capital structure of their real estate ownership. Unlike the Chonsei system, which requires infrequent debt payments, institutional mortgages require periodic debt payments, which compel households that leverage mortgages to be exposed to risk and uncertainty more often. That is, risk and uncertainty are less likely to be realized while households leverage the Chonsei deposit rather than institutional debts. This study employs a multinomial logit regression approach on the basis of annual panel data drawn from the Korean Labor and Income Panel Study (KLIPS). The empirical results indicate households whose debt structure only consists of the Chonsei deposit have higher probabilities of maintaining their real estate ownership despite the impact of risk and uncertainty. The findings of my dissertation research explicitly contradict contemporary theories of financial intermediation, which stem from axiomatic and pre-social premises of neoclassical economic thought. Instead, on the basis of historical circumstances and structural distinctions in the Korean housing finance system, my research explicates the evolving dynamics of wealth concentration in Korea, as it has transitioned toward financial globalization.