Property boom or bust

By John Burton

“House prices bubble up” was the headline for a recent article in the Economist that highlighted the recovery of property prices around the world due to monetary easing. Real estate prices have been on fire across many Asian markets. Home prices in Hong Kong have doubled in the last six years, while those in Singapore have risen nearly 20 percent.

But during that period, Korea has been a regional outlier at the other end of the property spectrum. Housing prices nationwide have stagnated since 2008, while those in Seoul have declined. The construction industry is in the doldrums as building orders have dried up.

The depressed nature of the Korean property market initially appears surprising. The Korean economy has performed relatively well since the global financial crisis in 2008, with export growth benefiting from strong demand in China and a weak currency. Real wage growth, although unspectacular, still remains positive.

What has brought the property market to a shuddering halt was a binge of housing construction in the middle of the last decade, which left a surplus of property that still has not been fully digested. There are still more than 50,000 new and unsold housing units across Korea, 60 percent of them in Seoul.

The situation was exacerbated by the fact that authorities imposed draconian measures to curb property speculation and rising mortgage debts by implementing tough regulatory restrictions on residential property purchases, especially in the Seoul region.

The property market represents a great challenge for the government. The housing market is stagnant, but homes are still too costly for many buyers. Moreover, the wealth of most families is tied up with their property, which they bought at the height of the real estate bubble a decade or more ago. They have been reluctant to sell their homes since they could suffer investment losses in a depressed market, which is another reason that property transactions have ground to a halt. Many want to sell their homes to escape crushing mortgage burdens, if they have the chance, and move to smaller or cheaper accommodations.

Breaking the property logjam has emerged as a centerpiece of the economic stimulus program of the new finance minister, Choi Kyung-hwan. The government has put pressure on the central bank to cut interest rates, which makes it easier to finance property purchases. In addition, the government has eased restrictions on mortgages, such as the loan-to-value and debt-to-income ratios, to boost property sales. Last week, the government took a step further by relaxing rules on apartment reconstruction projects to encourage the redevelopment of old buildings in central city areas.

The big question is whether these measures will turn out as the government hopes and increase the supply of affordable housing. There is plenty of room for skepticism.

Cutting interest rates should be welcomed since many Korean families suffer from one of the developed world’s largest debt burdens. Lower interest rates make sense when inflation is low and bank lending has been moderate.

But combining lower interest rates with relaxed rules on mortgages may be asking for trouble, since it could lay the foundation for a significant credit-fueled upswing in residential property prices.

The problem is that Korean households are Asia’s champion borrowers and have not taken advantage of lower interest rates over the past several years to pay off their debts. While Americans have used the opportunity of interest rate cuts to aggressively deleverage, Koreans have merrily continued to borrow and increase their debt pile. Korea’s household debt/disposable income ratio stood at a record 154 percent last year.

Expectations that borrowing will remain cheap and not enough new houses will be built could push housing prices higher since the new apartment reconstruction rules are meant to curb housing construction in new satellite towns. Moreover, reconstruction could worsen the shortage of rental units and raise rents.

The aggressive policy moves in the property market are understandable since the government wants to avoid a Japanese-style deflationary spiral in housing prices. Nonetheless, officials should allow market forces to run their course. Korea’s ageing population means that property prices are likely to fall over the long-term, but lower prices would naturally revive consumer demand.

Moreover, housing is beginning to look like a more worthwhile investment again. Although there have been relatively few buyers and sellers of houses, people still need a place to live. Rents and jeonse have shot up to record levels as a result.

When rents climb faster than housing prices, it means that housing is becoming a more valuable investment for buyers. This is the opposite of a speculative real estate bubble when housing prices outpace the rise in rents.

John Burton, a former Korea correspondent for the Financial Times, is now a Seoul-based independent journalist and media consultant. He can be reached at john. burton@insightcomms.com.