Stagnant South Korea Property Drags on Growth Rebound: Economy

South Korea’s worst property-market slowdown since 2004 threatens to limit the economy’s rebound, as the government’s stop-go policies to stimulate the housing market fail to secure any sustained revival.

Apartment transactions in Seoul plunged 80 percent in July from June, when temporary acquisition tax cuts expired, according to data on the city’s website. National home prices were flat or fell for 14 straight months through July, according to Kookmin Bank, the nation’s largest mortgage lender.

Injecting life into the real-estate market was a key goal for President Park Geun Hye when she took office in February, rolling out on April 1 tax breaks to spur demand and supply-control measures to support prices. Now, a construction downturn is adding to the risk of the nation missing the government’s 2.7 percent growth forecast for this year amid patchy demand for exports and near-record household debt.

“South Korea’s property market is sinking slowly, sapping the growth potential of the economy,” said Oh Suk Tae, a Seoul-based economist at SG Securities. “Given the large share of household wealth in real estate and the heavy reliance on mortgages, consumers will continue to scrimp on spending unless property prices make a sustained upswing.”

The weak housing market adds to the challenges for Asia’s fourth-biggest economy. The Bank of Korea forecast on July 11 that growth will pick up from 2.8 percent this year to 4 percent in 2014, the fastest since 2010.

Steps Planned

Finance Minister Hyun Oh Seok said in April when the government unveiled its property-boosting measures that a prolonged slump “can weigh on the entire economy.” In addition to the acquisition tax cut that expired in June, the government introduced tax breaks for first-time home-buyers with low incomes and for multiple-home owners subject to capital gains, both of which are set to expire at the end of the year.

The government is discussing how to cut housing purchase tax to “normalize” the property market, and will prepare steps by the end of August to be submitted to parliament, according to a joint statement by the finance, land and public administration ministries on July 22.

“Seoul’s housing transaction volume plunged in July and I expect almost the same across the country,” said Lee Mi Yun, a researcher at RealEstate 114, a Seoul-based real-estate information company.

No Home Run

South Koreans aren’t buying homes because they don’t expect prices to rise, said Lee at RealEstate 114. Lowering purchasing costs through tax breaks in such an environment will likely increase transactions but won’t lead to a dramatic rise in trading, she said.

“We’ve watched repeated minor measures to spur housing markets from the government. It’s like lots of bunts, but no home run,” said Stephen Lee, an economist at Samsung Securities Co.

Month-on-month house prices were unchanged across the nation in July, while falling in cities including Seoul, according to Kookmin Bank. Nationwide prices were down 0.9 percent from a peak in May last year after registering average annualized gains of nearly 5 percent over the prior 13 years.

The biggest problem facing the housing market is declining demand and “more than enough” properties, especially in the Seoul metropolitan area, said Wayne Lee, a property market analyst at Woori Investment & Securities.

Household Debt

South Korea’s property market is undergoing a transition from emerging-market type that experienced an investment boom for decades to a more mature market, said Woori’s Lee. To pick up again, interest rates must decline and returns from renting out properties must rise, he said.

“Unless these two conditions are met, buying a home won’t be an attractive option,” Woori’s Lee said.

The government is balancing efforts to revive the property market with concerns about rising household debt, which Bank of Korea Governor Kim Choong Soo said last week restricts growth potential of the economy.

The impact of falling housing transactions will be larger in the third quarter, as deals then won’t be subject to lower acquisition taxes while the National Assembly won’t discuss property measures that require its approval until September, said Lee at Samsung Securities.

Growth in construction investment, which helped to drive an expansion in second-quarter GDP, is set to slow, partly due to slowing growth in housing completions, Samsung’s Lee said.

Construction Sputters

“The economy can’t grow up to 4-5 percent, its potential growth rate before the global financial crisis, as long as the property market remains sluggish,” said Oh at SG Securities.

Construction in South Korea has sputtered. Residential building permits fell 24.4 percent in the first half of 2013 from a year earlier while housing starts dropped 19.2 percent, according to land ministry data released July 28.

The KOSPI 200 Construction sub-index has lost 22 percent this year, steeper than a 3.7 percent slide in the Kospi Index.

South Korea’s sagging property market contrasts with Hong Kong, where the government has taken steps to cool overheating, and China, where officials are trying to limit price gains and the risk of asset bubbles. The cost of a new apartment in Beijing jumped about 13 percent in June from a year earlier, according to the statistics bureau. Singapore home prices climbed to a record in the second quarter.

South Korea faces a slowdown in China, its biggest foreign market, and a 28 percent jump in the won against the Japanese yen over the past year that hurts its export competitiveness.

PMI Falls

South Korea’s exports increased 2.6 percent in July on year after a 1.0 percent decline in June, the Ministry of Trade, Industry and Energy said last week. A Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economic fell to 47.2 from 49.4 in June, indicating contraction.

In economic data around the world today, services industries gauges will be released across Europe and in the U.S. after an Aug. 3 release showed that China’s official measure rose. Growth in U.S. service industries probably picked up in July, indicating the biggest part of the economy is benefiting from gains in hiring and a rebound in the housing industry.

The Institute for Supply Management’s non-manufacturing index will rise to 53.1 from June’s 52.2, the lowest level since February 2010, according to the median forecast of economists surveyed by Bloomberg News.

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