Is Korea following the path of Japan?
Rising rent prices, demographics of aging population are reminiscent of Japanese 'lost decades' deflation
By Jung Sung-ki
With the stagnation in the Korean property market continuing, there remains concern as to whether the country could face a Japan-style burst in the bubble in the real estate market.
A surge in demand for rented houses, in contrast to a decrease in the rate of homeownership, and the demographics of a shrinking, aging population, in particular, show similar patterns to the Japanese asset price bubble collapse two decades ago, according to experts.
They pointed out that although the ups and downs of the property market here have been milder than those in Japan, there is a clear parallel, saying that timely monetary policies and proper regulation of debt are essential to head off real estate deflation.
Lee Keon-soo, a researcher from Mirae Asset, expressed concern that Korea is risking a Japan-style bubble burst in its real estate market in the face of a rise in demand for rental houses, and the demographic problems of an aging population and low birthrate.
The nation’s ultra-low birthrate is expected to shrink the labor force and depress economic growth. According to a recent survey by HSBC, the workforce will contract by 32 percent by 2050, knocking 1 to 1.3 percentage points off the annual growth rate during the period from 2020 through 2050.
House price boom is over
“It’s certain that the days of splurging on houses as an investment is all but over, and this trend may lead the country down the path of Japan,” Lee said. “It’s hard to imagine the house-price booms of the mid-2000s happening again.”
Kim cited the imbalance of housing supply and demand, as well as the aging population as key factors leading to a potential long-term recession.
Nomura Securities chief economist Kwon Young-sun has warned Korea may be in danger of suffering a Japan-like collapse of the real estate market if the Bank of Korea (BOK) continues on its low rate trajectory.
In a report released in January, titled “Part II: South Korea Reminiscent of late-1980s Japan,” Kwon claimed there were “striking parallels” between Korea’s monetary policy and that of Japan 20 years ago.
“Although Korea is likely to avoid a rise in asset prices for housing and equities due to government limits on property costs and strict bank lending to market investors, it is still in danger of ‘speculative demand for corporate bonds’ and excessive borrowing by households resulting from low interest rates,” he wrote.
On March 10, the BOK hiked its policy rate by 25 basis points to 3 percent in a bid to tame inflation but Korea’s central bank has been blamed for moving too late and is falling behind the inflation-fight curve.
Kwon said if the government prolongs its deregulation of mortgage financing, which is supposed to end in March, it would make the credit channel ineffective as mortgages have already picked up markedly since the fourth quarter of 2010.
“Such a ‘growth over inflation’ policy could be positive for asset prices, strengthening investors’ bullish expectations, but this may also deteriorate the transmission mechanism of the monetary policy through the expectation channel,” he said.
On the other hand, some economists said that although there is a parallel, concerns over a Japan-style bubble burst are overblown, citing population and other factors.
“It’s obvious that Korea is undergoing a period similar to what Japan experienced in the 1980s and early 1990s on the surface,” Ko Jong-wan, the head of RE.Members, a real estate consulting firm, said in a phone interview with The Korea Times.
For example, he said, Korea is 15 to 20 years behind Japan’s footsteps regarding the demographics, urban development and other indexes. He said Japan’s working population age peaked in 2005, whereas Korea is expected to peak by 2020. Urban development in Tokyo also thrived at least 15 years earlier than in Seoul.
However, Korea is unlikely to go down the path of Japan because of a huge gap in the scope of bubble inflationary effects between the two countries, the consultant, who served with President Lee Myung-bak’s power transition team, argued.
“There’s a wide difference between Japan’s asset inflation in the 1970s and 1980s before prolonged real estate trouble, and Korea’s asset price bubble between 2002 and 2006,” said the analyst. “That is, the scope of Japan’s inflationary bubble at the time was far higher than Korea’s, so it can hardly be compared to the case of Korea.”
Against that backdrop, he continued, chances of Korea facing a Japanese-style collapse of the real estate market were slim, though house prices may continue to fall for a certain period of time.
Housing prices and rent in Tokyo are still in the top level by world standards despite deflation over the last two decades, according to Ko, casting doubt on some data suggesting Korea’s price to income ratio (PIR) is one of the highest in the world.
“Statistics vary, but according to a recent survey by a U.K. institute, rents in Seoul are 15th in the world, and fourth in Asia,” he noted. “Given our economic scale is the 12th to 13th in the world into account, those prices can be regarded actually as lower than average.”
Though Tokyo has GDP and land areas two times or more than Seoul, the population density in Seoul is higher. Seoul has about 10.2 million and Tokyo, 12.8 million.
“The higher population density in Seoul means the number of households in the capital area will rise and the demand for houses could remain high despite an anticipated decline in the population beginning 2030,” Ko said.
The concentration ration of population in the metropolitan area is also expected to rise from the current 30-something percent to 50 percent or more by 2030, he said.
Kim Sang-hoon, head of Shinhan Bank’s real estate strategy team, also downplayed the possibility of a property bubble.
Unlike the situation in Japan where companies joined individuals in the aggressive buying spree, private investors are the major buyers in Korea, making the size of individual investments small, he said.
In contrast with Japan, on top of that, Korea has seen apartment prices rise sharply in specific areas, such as Gangnam and redevelopment districts, so that the bubble concern is not nationwide but limited to particular areas in Seoul, said Kim.
“Furthermore, the Korean government has occasionally stepped in to curb housing prices by toughening lending policies, such as loan-to-value (LTV) and debt-to-income (DTI) ratios, so there’s not a big possibility that Korea is following the footsteps of Japan’s bubble bursting,” he wrote in a report on financial technology last November.