Korea focus: House rich, cash poor

Korea’s real estate market has been weak for some time. Since the 2008 global financial crisis, property prices have grown at only half their long-term rate.

Momentum remains skewed toward the downside, with national prices recording their sharpest monthly decline in more than three years. Lower property prices decrease homeowners’ assets.

Through the wealth effect, these households will respond by reducing their consumption. This is important because consumption in Korea has the highest sensitivity to changes in residential property prices in Asia. Therefore, ongoing weakness in the property market is holding back domestic demand from supporting Korean growth at a time when exports look already shaky.

Property has become more affordable, but demand remains weak. There are low-income households that still cannot buy. They are burdened by debt repayment and are unable to accumulate sufficient savings.

In addition, households with the financial capacity to buy property won’t buy. Most take the self-fulfilling view that real-estate prices will not pick up and opt to rent even as the fixed-sum deposit under the prevalent Jeonse renting system rises.

Hence, the housing market has increased Korean household debt, with interest repayment sapping away disposable income: giving rise to the phenomenon “house rich, cash poor.”

Policymakers are acting to stimulate transactions. At the start of 2012, some measures previously implemented by the government to stem rising property prices were removed.

Further plans were announced on 22 July to boost transactions by easing limits on the debt-to-income ratio on residential mortgages from banks. But there is still an oversupply of unsold housing. More may need to be done before demand can pull prices back up.

Supporting employment growth is one sustainable way to protect Korea’s property market ― especially in manufacturing dependent areas such as Ulsan. More jobs will raise household income and brighten the economic outlook, which will likely support demand for property.

For policymakers, pressure will build on them to reveal a supplementary budget. The Bank of Korea, too, is likely to cut rates further to 2.75 percent in September ― which lessens the interest repayment burden on high household debt to lift consumption.

By Ronald Man

(HSBC Asia division economist )