Asset deflation clouds Korean economy

Falling prices of property, stocks deal blow on consumption


Fears of an asset deflation are casting a shadow over the Korean economy as prices of real estate and stocks continue their downward streaks.

Murky outlooks on the recovery of asset prices dampen consumption and investment in the long term, which in turn pulls down asset prices further.

The value of real estate, which takes up about 80 percent of assets owned by Korean households, has been dropping over the past four years.

Apartment prices in Seoul last month fell about 10 percent compared to June 2008, just before the global financial crisis. Prices of new apartments also tumbled to about 71.3 percent of the price before the crisis.

“As for the property market, you can say that asset deflation began right after its peak in 2008,” said Seon Dae-in, who runs an economic think tank named SDINomics.

“If household debt continues to rise, asset prices are unlikely to maintain current levels.”

The situation is not so much different in the stock market, where investors usually turned to in the past when the property market was stagnant.

The local stock market cap shed some 150 trillion won from its peak in May last year, according to the Korea Exchange.

The downward spiral can continue for a while with the mounting household debts and the persisting European fiscal crisis.

Falling asset prices deteriorate consumer sentiment, resulting in declining consumption.

Sales at large discount store chains and department stores have dropped 2.4 percent in April, 5.7 percent in May, 7.2 percent in June and 8.2 percent in July from a year ago, according to the Ministry of Knowledge Economy. It is the first time since the collapse of Lehman Brothers in 2008 their sales slid on-year for four months in a row.

As for the banking sector, the share of bad debts is rising amid the asset deflation.

The share of bad debts in household loans constantly grew from 0.54 percent in late 2008 to 0.56 percent in late 2010, 0.6 percent by the end of last year and 0.76 percent in late June.

“Asset deflation is a phenomenon that occurs naturally as the property market bubble bursts,” said Lee Jae-seung, a senior researcher at KB Investment and Securities.

“There can be some side effects as the asset prices cool, but this could reduce the risks of a bubble economy.”

Transaction volumes in the property and stock markets also plummeted on lowered expectations on their profitability.

The number of home transactions in the first seven months of this year plunged 30 percent from a year ago to 400,799 nationwide.

Stock transaction volume shrank 20 percent or by 260 trillion won in the same period to about a 1 quadrillion won.

Analysts say the property market is unlikely to pick up anytime soon as the economic slowdown presses down demand and the supply of low-priced homes perturbed the market. The government’s easing of the mortgage lending regulation on debt-to-income ratios did not help stimulate demand.

Dwindling property transactions mean more difficulty for households, especially retired people, in increasing wealth or securing cash.

By Kim So-hyun (sophie@heraldcorp.com)