South Korea may clamp down on housing bubble

Its central bank may break ranks with G-20 partners and raise interest rates

(SEOUL) Would-be home owner Hwang Min-soon is the sort of bullish property buyer who may prompt the central bank to break ranks with the G-20 and raise interest rates.

She is considering the purchase of a 104 square metre apartment in Seoul, where property prices have defied the global financial crisis to rise 20 per cent since the start of the year. When asked the sort of return she expected on her investment, Ms Hwang replied: 'In the next two to three years, I'd say 70 to 80 million won (S$84,000 to S$96,000).' That would be in the order of 30 per cent.

Property prices in South Korea are rising rapidly and, since urban South Koreans show no sign of losing their voracious appetite for property, so, more worryingly, are mortgages.

The central bank slashed its interest rates to a record low of 2 per cent to support the economy during the crisis. But it is now highlighting the property binge as reason enough to start raising them, even if that means breaking ranks with its G-20 partners, who have pledged to keep stimulus measures in place. Financial regulators are also ready to impose more controls on home loans.

The central bank meets later this week, although it is not expected to change rates. However, financial markets have priced in the risk of a rate rise as early as November.

If the global downturn has hammered property prices in the US and other leading economies, those in the Seoul metropolitan region - which houses half South Korea's population - have hardly paused for breath.

Still, most of the rally may be over and buyers such as Ms Hwang may not get the returns they are looking for. A Reuters poll of property consultants, analysts and economists forecasts house prices are set to rise another one-2 per cent by the end of 2009 and another 3.3 per cent in 2010.

That would be a sharp slowdown from the heady pace seen so far this year and certainly not the returns that Ms Hwang and others are hoping for.

Indeed, the poll suggested that prices will rise a further 6.5 per cent from current levels before peaking sometime in the next few years. If history is anything to go by, the property rally may well be far from over. Since the Asian financial crisis in 1997/98, property prices in Seoul have more than tripled.

Increases are even bigger in southern Seoul, where a reputation for good schools and large capital gains are driving demand.

South Koreans put nearly 80 per cent of their assets into property, compared with barely half in advanced economies where more investment goes into areas like pensions. Mortgage loans, for instance, have risen for eight consecutive quarters despite the economy's slide during the global financial crisis.

The appetite for property, say analysts, makes the financial system more vulnerable to a house price bubble, which has been fuelled partly by a wave of cheap money pumped into the economy by the government to ease the pain of the downturn.

The property rally has also been spurred by pent-up demand after authorities last year repealed measures imposed in 2006 and 2007 to clamp down on the last speculative wave of house buying.

It risks, says the central bank, getting out of hand. So, it has threatened to raise rates. The finance ministry is opposed to the idea in case higher borrowing costs damages the economy.

While financial markets suggest a rate rise could happen as soon as next month, many analysts see them on hold until next year. 'The Bank of Korea is very concerned the housing market and household debts have just kept expanding even through the crisis period,' said Song Jae-hyeok, an economist at SK Securities.

Korea is not alone in seeing the danger of an asset bubble forming in its housing market. Australia's central bank has flagged similar dangers and markets say that it could raise rates as soon as today.

Property prices are rising sharply in China, Singapore and Hong Kong. Central bankers, including those in the US and Europe, are debating whether interest rates - usually a weapon that impacts an economy broadly - is the right tool to clamp down on speculation in a single sector.

An International Monetary Fund report published recently pointed out that central bankers could have helped prevent the current crisis that was sparked by housing prices bubbling over. -- Reuters

Source: Business Times, 6 Oct 2009