South Korea: Housing market sizzles again

Source : Straits Times – 25 Sep 2009

It is hard to miss the upbeat mood in South Korea these days. The latest economic indicators coming out of Asia’s fourth-largest economy show that the country is edging out of the financial doghouse that the world was thrown into late last year.

One indicator that analysts have pointed to is the slowly but steadily rising housing prices. The appetite to buy property has returned on the back of record low borrowing costs.

Since April, housing prices have climbed for five consecutive months, according to market data by Kookmin Bank. Last month, prices rose another 0.3 per cent above the previous month.

Housing prices in Seoul, the economic heart of the country, have a bearing on prices nationwide, and they went up by 0.5 per cent. Transactions also picked up.

‘People are confident enough to buy houses because they sense they don’t need to hold on to cash any more,’ said Mr Lee Chung Yeol, a real estate agent in the Gangnam district.

‘The only question is how sustainable that demand will be.’

Mr Ahn Myung Su, 34, who bought an apartment in Mapogu in western Seoul two months ago, is happy with his purchase.

‘I think if I had waited longer it would have gone out of my budget range,’ he said.

Though aware that the market was volatile, he was not concerned. ‘We are going to live here for a while so I am less worried about price drops.’

Observers have warned of a bubble forming in the housing market as speculators are contributing to the rising demand. Officials are concerned that if the bubble bursts, it could put the country in a worse position than in the immediate aftermath of the global collapse late last year.

In July, the government decided to cap the amount of money home-buyers can borrow. The limit was lowered to no more than 50 per cent of the value of a residence in Seoul and nearby areas, down from 60 per cent. Banks were instructed to look closer at incomes when granting loans.

Still, talk of financial doom has eased.

Finance Minister Yoon Jeung Hyun said: ‘The Korean economy is expected to continue a recovery trend in the second half of the year, helped by improvement in internal and external factors.’

There is also good reason to be optimistic.

South Korea’s gross domestic product grew at a rate of 2.6 per cent more in the second quarter than in the first, the fastest quarter-on-quarter growth among Organisation for Economic Cooperation and Development members.

The benchmark stock index Kospi, which nosedived from the 1,400 level last September to below 940 last October, is hovering around the 1,700 level this week.

For an export-driven economy, the Korean won has performed well against the US dollar – it has strengthened from 1,570 won in early March to 1,194 on Wednesday.

Mirae Asset Securities Co, the country’s biggest seller of mutual fund products, predicted earlier this month that the Kospi could rise to 1,800 by the end of the year because of improved corporate earnings.

The positive indicators have fuelled a debate on when and how the government will take care of the excess liquidity poured into the market as part of the aggressive measures it implemented to spur corporate investment and stimulate consumption.

Well aware that a premature exit from its expansionary path could put the economy at risk of sliding into a ‘double-dip’ recession, the Bank of Korea has kept the benchmark interest rate unchanged at a record low 2 per cent for a seventh straight month.

For now, the government is keeping its fingers crossed that it can keep the momentum going.

‘In the coming months, the Korean economy is likely to maintain its positive growth on a quarter-on-quarter basis, helped by the improvement in the world economic environment and the rebuilding of inventories,’ the Bank of Korea said in a statement.

On a more cautionary note, it added that a number of uncertainties surround the actual pace of growth.

Mr Lee Jae Joon, a researcher with the Korea Development Institute, said: ‘The Korean economy has entered a recovery phase. I expect the export and import levels to return to normal soon.

‘But there is a chance that the economy might contract once the government starts to absorb all that liquidity.’