Property Recovery Will Not Be Smooth Sailing
BMI View: Recent data releases on South Korea's real estate sector suggest that the market may have bottomed and that a recovery is in place. While we remain fairly constructive on property prices in the near term, we believe that the recovery is unlikely to be smooth sailing as economic headwinds continue to mount while a considerable supply glut in the housing market remains. Furthermore, while president Park Geun-hye may have made support for the housing market a priority, her administration is unlikely to allow a rapid recovery as household debt levels continue to present a latent risk to the economy.
Prices Have Clearly Troughed…
According to recently released figures from the Bank of Korea (BoK), South Korea's property market appears to be have bottomed out and looks to be on the rebound. After spending much of 2013 in contraction, property prices saw their fourth successive month of expansion in February, with growth accelerating to 0.8% year-on-year (y-o-y) from 0.1% in November. While prices may still be in decline in Seoul, the pace of contraction has decelerated markedly. Seoul apartment prices fell 1.1% y-o-y in February, considerably slower than the peak of 4.8% witnessed in early 2013. While we believe that the real estate market may have bottomed out and the uptrend in Korea's property prices may still have some room to run in the near term, we believe that this it is unlikely to be a one-way bet for the property market going forward.
|Real Estate On The Mend|
|South Korea - Property Prices (LHS) and Credit To Households (RHS)|
Thus far, the nascent recovery in the property market has come on the back of an introduction of a series of relief measures by the government, as well as on improving confidence in the economy as economic momentum gained steam towards the tail end of 2013. Seoul progressively introduced a series of tax breaks while borrowing costs were lowered following the BoK's two interest rate cuts last year. We consequently believe that the effects of these measures are starting to feed through into the economy. According to data released by the Ministry of Land, Infrastructure and Transport (MLIT), home transactions in February hit a five-year high of 58,846 in February while the number of unsold homes fell markedly. At the same time, the successful bid rate at auctions was at its highest since the Global Financial Crisis. These developments collectively point towards a likelihood that the property market has bottomed after a protracted period in contraction and that a recovery is in the offing.
…But Headwinds To Smooth Recovery Everpresent
That being said, the recovery in the housing market is unlikely to be smooth sailing as economic headwinds continue to buffet. As we have written previously (see 'Maintaining Our Below-Consensus 2014 Growth Forecasts', January 23), the recent acceleration in economic momentum is unlikely to last through the entire year as export momentum begins to recede following the drag from China's slowing economy, as well as from the downward pressures stemming from corporate Korea. Also, while we may have seen a fall in the number of the number of unsold houses, there remains a considerable supply glut within the market and it may take a protracted period of time for these imbalances to be ironed out. While president Park Geun-hye has made reinvigorating the housing market one of her key priorities, her administration is unlikely to allow a rapid recovery as household debt levels remain elevated and present a latent risk to the structural well-being of the economy.