South Korea Set to Fuel Property as China Moves to Cool: Economy

South Korean housing sales at the lowest levels since 2006 are increasing the urgency of President Park Geun Hye’s plans to bolster the market, just as China, Singapore and Hong Kong enact cooling measures.

Transactions fell 14 percent to 47,288 in February, the least for that month in seven years, according to the land ministry. Prices are also sliding, with values in Seoul lower than any time since March 2008.

While Asian neighbors wrestle with housing costs propelled by increased incomes and inflows of capital, in South Korea a household-debt binge is constraining mortgage borrowing. With the Park administration set to hold its first full cabinet meeting in Seoul tomorrow after the new leader took office on Feb. 25, HSBC Holdings Plc says fiscal stimulus is needed.

“Demand has slumped and is proving difficult to revive,” said Ronald Man, an HSBC economist in Hong Kong. “Incomes need to rise faster to spring the real-estate market back to life.”

The government may announce a supplementary budget of 10 trillion won ($9 billion) on March 26, Yonhap News reported yesterday, without saying where it got the information. Asked about the Yonhap report, Choi Sang Mok, a director general at the finance ministry, said no decision had been made.

Ruling and opposition lawmakers agreed to this month approve reinstating a home-purchase tax cut, according to their e-mailed statement on March 17. Still, the Financial Services Commission is not considering easing debt-to-income and loan-to-value restrictions on mortgage borrowing, chairman nominee Shin Je Yoon said in parliament on March 18.

Singapore, China

In Singapore, home sales plunged in February after the government’s seventh round of cooling measures. Prices in the city-state had climbed to a record in the fourth quarter. Hong Kong has expanded curbs and warned of the risk of an abrupt drop in prices. In New Zealand, the central bank says it’s guarding against the risk of a bubble.

China this month intensified curbs on the property market as the new Communist Party leadership aims to limit the risk of bubbles and keep housing affordable. Chinese officials are among those expressing concern about possible inflows of capital from monetary easing in developed nations.

“Unlike China where more people entering the middle-class are boosting demand, the housing market in South Korea is quite saturated,” Seung Yeon Ju, a property-market analyst at Daishin Securities Co., said in Seoul. “Demand here has become quite weak with less people betting on properties for investment purposes amid abundant supply.”

Sagging Sales

In South Korea, January’s total of 27,070 home transactions was the second-lowest for any month in data starting in 2006, after tax breaks expired in December, land ministry data show.

Demand has slumped after mortgage-lending restrictions were rolled out over the past decade to limit bubbles and as pessimism over valuations increased because of the global financial crisis, according to HSBC’S Man. Household debt climbed to a record 959.4 trillion won in the fourth quarter of last year.

Residential house prices slipped 0.5 percent in February from a year earlier, the biggest decline since September 2009, according to data from Kookmin Bank. Prices fell 0.1 percent in February from January, an eighth straight monthly drop and the longest losing streak since 2005, even after the Bank of Korea cut benchmark borrowing costs twice last year.

Worst Winter

“It was the worst winter ever since I started the real estate business in 1996,” Im Hyeong Lim, 60, a property dealer in Mokdong, one of the most affluent residential areas in Seoul, said yesterday.

“I was sitting idle with no transactions at all in January and only one deal in February,” she said. “Many people are delaying purchases in fear of further price declines.”

A sagging property market adds to the challenges posed by the yen’s declines against the won, which aid export rivals in Japan, and population aging, set to cut the nation’s labor force. The won fell today to near its weakest against the dollar in six months, after the government said it will consider measures to curb volatility in capital flows. The won was at 1,119.86 per dollar as of 12:29 p.m. in Seoul, according to data compiled by Bloomberg.

South Korean officials aim to get the nation closer to a potential growth rate estimated by central bank Governor Kim Choong Soo at 3.8 percent, after last year’s 2 percent expansion was the weakest since the global recession.

Construction Companies

“The property market is in a dire situation, with many small builders suffering credit problems,” said Cho Dong Pil, a construction industry analyst at Hanwha Investment & Securities Co. in Seoul. “Reviving the housing market will be one of the foremost policies for the new government as falling home prices can send household debt out of control.”

Companies that will benefit from any pick-up include Hyundai Industrial Co., Daewoo Engineering & Construction Co., and Halla Engineering & Construction Corp., Cho said.

“My top policy priority is a quick normalization of the property market,” Minister of Land, Transport and Maritime Affairs Suh Seoung Hwan said in his inaugural speech on March 12, adding that a slump had gone on for too long and “effective policy measures are in urgent need.”

With a birth rate of 1.24 children per woman in 2011, South Korea will be short 2.8 million workers by 2030, according to a Finance Ministry report released on Dec. 26. The nation’s potential gross domestic product growth would drop to 1.9 percent by 2031 from a 3.8 percent average pace during 2011-2020, the report said.

Federal Reserve

“South Korea’s property market has been where the biggest portion of wealth went for a lot of people for decades. This isn’t true any more,” Park Won Gap, senior analyst at Kookmin Bank said by phone. “People no longer believe that betting on properties will pay off for two big reasons -- oversupply and an aging population.”

Elsewhere today, the U.S. Federal Reserve will announce a monetary-policy decision and the Bank of England releases meeting minutes. Officials in Europe must weigh how far to push Cyprus after lawmakers in the Mediterranean nation rejected an unprecedented levy on bank deposits, throwing into limbo a rescue package to keep it in the euro.

The Bank of Korea’s Kim told economists in Seoul today that the crisis that rocked the global economy and financial system in recent years may be in its final stage.

“We can’t say the crisis is very near an end yet but we’re in a process of wrapping it up gradually,” he said.

Before it's here, it's on the Bloomberg Terminal.