"I bet my life on my innocence," said Sohn Hye-won. The member of the 20th National Assembly and now former member of the Democratic Party has resigned her party membership due to persisting suspicions about alleged land speculation. Her words met with apathetic responses from the public, who have a cold stare in return. This case reminds us that issues regarding real estate have always been a serious issue in Korean society. This case especially has helped to raise awareness among citizens, to become highly sensitive to not only speculation but also to the investments of public figures.
Recently, Sohn generated controversy about alleged land speculation that she has been suspected of taking advantage of using her governmental authority. Apparently, she had her family members buy buildings in Mokpo District before it was designated as a cultural asset site by the National Assembly Culture, Sports and Tourism Committee, which Sohn was a member of.
A flurry of interest was also aimed at IU, a famous K-pop singer. It was reported that IU profited substantially from the Great Train eXpress (GTX) project, purchasing buildings with the intention to sell them at higher price in the future. However, while experts say that she is innocent of any crime, yet, the public even made petitions over her purchase, showing great concern about the real estate dealings of public figures.
Behind the fury lies a confusion between speculation and investment. With two successive events that show people’s rage over public figures’ possible association with real estate issues, it is evident that contemporary Korean society is facing great confusion understanding the term speculation. Therefore, a proper understanding of this concept is clearly in need.
▲ Professor Kim Changki explaining about the difference between investment and speculation. Photographed by Kim Seung Hye
Speculation, a Feigned Name of Investment
The true meaning of speculation is controversial. There is no absolute standard that differentiates the term investment from speculation. Professor Kim Changki (Department of Business Administration) explained that the two terms are often hard to distinguish as they both aim to gain future profit. Though, the logic underlying the behavioral pattern of stakeholders provides a hint to resolving this confusion. While investment refers to stakeholders investing capital to stimulate economic activity, speculation indicates an act of solely pursuing large profits regardless of the national economy.
Investment is helpful for a sustainable society, whereas speculation is lucrative for individuals; risk is the conclusive factor of this game. In that sense, experts consider two aspects to determine which term applies: time interval and purpose. For instance, Stephen Rischall, a financial adviser featured in the Wall Street Journal , asserted that investment is synonymous with marathon and speculation with sprint. Investing is expected to generate stable returns in the long run, usually in a form of accumulated wealth. On the other hand, speculating involves the purchase of assets that make comparatively quick returns.
However, while Rischall’s explanation has been widely accepted for its relevance, it does not always ring true. “There is a slight fallacy in people’s hasty generalization,” said Professor Cho Joo Hyun (Real Estate Studies, Konkuk University). He asserted that people’s general thoughts are understandably convincing, yet it is a mere compromise. For instance, it becomes more complicated when short-term investment in the stock market is profitable, and investors suddenly turn into speculators, and vice versa. Because the true purpose behind utilizing capital is elusive, considering short-term moves with high profits as a sign of speculation is a rash assumption.
▲ Professor Cho Joo Hyun. Provided by Professor Cho Joo Hyun
Embers of Fire Create an Explosion of Flames
Then, why is classification so important? While erroneous biases make the two terms seem similar, the riskiness of speculation should not be treated the same as that of investment. Speculation creates a flash of prosperity that lasts for a second. When bubbles finally burst, there is a sudden decline in wealth. “It is a zero-sum game for the majority who will experience loss in the end,” commented Professor Kim.
For instance, the Tulip mania that occurred in the 17th century clearly shows the danger of excessive speculation in the market. During that time, horticulture was emerging as a trend in Holland. Eventually, tulips were selling for the price of houses. People became frenzied speculators who mortgaged entire properties until the price of tulips collapsed overnight and their financial assets were swept away. It not only contributed to a downturn in the Dutch economy but also made the way for England to become an economic power. In that manner, people are understandably nervous about allegations of speculation among public figures.
Stem the Nationwide Waves of Cynicism
Meanwhile, the vagueness of such a definition could result in malicious people taking advantage of the confusion. To prevent this, better governmental measures should be put forth. Professor Cho remarked, “Curbs on multiple home ownership is a suboptimal solution.” There is a prevalent idea in Korea that multiple apartment owners, without the sole purpose of accommodation, pose a threat to many who are house-poor. Still, awareness is not enough. “This policy is rather a product of political morphology, where people develop a rhetoric of ‘I am an investor, but you are a speculator’,” added Professor Cho. Considering that Korea is the only country that, with great enmity, deems multiple homeowners as speculators, this regulation needs careful consideration.
Instead, other methods could be sought. Both Professor Cho and Kim noted that developments are made in current society in terms of risk management. The term deals with developments in financial techniques that could turn speculation into investment, breaking down barriers built by privileges and controlling risk elements for society. For instance, while the previous structure of the real estate market is favorable to only mammoth capitalist organizations, the gradual introduction of techniques such as Real Estate Fund and Real Estate Investment Trusts (REITs) is also allowing small firms to invest, resulting in a fair market with safeguards against speculation. These policies could be adapted in different areas in society where incomplete information poses a threat to people involved.
At the most basic level, speculation is simply a part of investment. If this behavior is guided in the right direction, public concerns will be relieved. Because speculation is highly dependent on a psychological state, which is not easily detected, practical sanctions should take place. To deal with the matter in a comprehensive way, public efforts toward a correct understanding of speculation are needed. While not all investors are speculators, it is always that matter of inches that will tell.