Property Woes To Impinge Further On Economy
BMI View: Despite having been one of the regional underperformers in recent years, we still expect further weakness in South Korea's housing market. Structural downside pressure in the form of a supply overhang situation and deteriorating demographics will continue to push prices lower. This is likely to carry adverse ramifications for the broader economy as consumption spending is stifled, as well as banks which have a considerable portion of their loan books tied to the housing market. For now, while we are sticking to our neutral stance on interest rates, we highlight, however, that the scope for further monetary easing is increasing and further ill-boding data may cause us to alter our views.
Moribund state of the housing market: There appears to be no end in sight to the slump in South Korea's housing market. Recent data shows that the decline in Seoul's house prices continues unabated, with the contraction accelerating from 4.7% year-on-year (y-o-y) in January, as compared to the 4.5% print registered in December. Seoul property prices have now been in contraction for a full two and a half years (see chart). Indeed, a report released recently by the Korea Development Institute (KDI) shows apartment transactions to have witnessed their largest fall in six years in 2012, declining 21% during the year. On the whole, housing prices in South Korea witnessed a miniscule gain of just 2.9% through 2012. This contrasts strongly with regional economies (such as Hong Kong, Singapore, Taiwan and Malaysia), which, despite the relatively bleak economic backdrop, have witnessed robust growth within their real estate markets.
Structural downside pressure remains: The developments in South Korea's housing market have been pretty much in line with our expectations (see our online service 'North East Asia Property Markets Facing Strains', March 5, 2012). Looking ahead, we are maintaining our call for weakness in the housing market. The supply overhang situation is likely to persist as housing starts presently remain relatively elevated, even as the bulk of the surge in housing construction that began in 2011 is slated to come online in the coming two years. Meanwhile, demand is also expected to come in weaker in the near-term, as economic uncertainty prevails, as well as in the longer-term, as South Korea's demographics start to deteriorate. According to the United Nations, South Korea is expected to become an aged population and super-aged population by 2018 and 2026 respectively. To put things in perspective, Korea's housing supply ratio, which measures the total housing supply to the number of households, has continued to steadily creep up in recent years. Taking into consideration the fact that the active population is estimated to start declining in 2014, we can expect to witness structural downward pressure on house prices.
|Stuck In The Doldrums|
|South Korea - Housing Price, % chg y-o-y|