Speculative Nature of the Housing Market and Household Polarization: A Portfolio Theory Perspective*

This study explains the phenomenon of wealth polarization in South Korea, focusing on the inclusion of housing as an investment asset in household portfolios. The concept of distance between tangency portfolios on the maximum Sharpe ratio line was introduced to illustrate the differences arising from housing ownership in portfolio composition. Mortgage constraints were incorporated into the model to account for the high unit cost and indivisibility of real estate, and this analysis was applied to apartments in Seoul and the greater metropolitan area. The results indicated that housing investment exacerbates wealth polarization, with mortgage borrowing constraints notably impacting investment performance. This effect was particularly pronounced for apartments in Seoul compared to those in Gyeonggi and Incheon, suggesting that the former play a greater role in exacerbating wealth polarization as investment assets within the metropolitan area. The significance of this study lies in its application as an optimal portfolio approach to quantify household welfare disparities and the extent of polarization.