Asset deflation woes deepen
By Kim Tong-hyung
Households are straying down the path of asset-price deflation, critics warn, as the skid in house prices looks increasingly inexorable while the stock market is alarmingly devoid of vibrancy.
Policymakers, who are desperate to boost housing demand artificially, repeatedly point to the historically narrow gap between home rents and purchase costs to declare that the property market has hit the bottom.
Well if it has, then it’s been digging itself a hole and there are no telltale signs it will be clawing its way back up in the foreseeable future.
While the sharp decline in property values since the recent downturn has left millions of homeowners stuck with negative equity and facing the threat of a lifetime in debt, the stock market is struggling to provide relief.
Despite worsening global conditions, highlighted by a toxic European Union economy and one slowing in China, the country’s benchmark Korea Composite Stock Price Index (KOSPI) has so far managed a modest annual gain. However, take out from the equation Samsung Electronics, the biggest fish in the pond, and this growth becomes a loss.
The average price of apartments, which continues to be the main drive in the property market, fell by nearly 10 percent in July compared to the level of June 2008, when the global economy was on the verge of a financial meltdown.
Transactions are evaporating faster than rain in the Sahara. The number of homes trading hands reached 400,500 in the first seven months of the year, down by more than 30 percent from the same period last year, not that transactions were exactly flourishing then, according to data from the Ministry of Land, Transport and Maritime Affairs.
First-time buyers have been postponing their plans to get on the property ladder in the face of further market uncertainty, resulting in an exploding demand for rental homes that are further complicating Korea’s housing problems.
Koreans threw themselves in a ruthless property binge in the early- to mid-2000s on the blind faith that house prices would rise forever. The Lehman Brothers collapse ended that dream and now the country is left with a historically high level of household debt that matches an entire year’s gross domestic product (GDP) and poses a considerable threat to the country’s financial stability.
``Will house prices ever regain their pre-Lehman Brothers figures? In nominal terms why not, when inflation will continue to eat into the value of money? The question is real value and now it’s hard to imagine homeowners will ever be able to recover the losses there,’’ said Park Won-gap, head of the real estate business department at KB Kookmin Bank.
``Let’s face it, apartments will never be the low-risk, high-reward financial item they were during the housing boom. The nation is too heavily in debt and we simply don’t have enough people willing or able to continue rolling the dice like that. The fall in apartment prices has coincided with rising demand for detached homes, so you have to say there’s still non-speculative housing demand. Still, we have entered an era in which people are buying homes to have a roof over their heads instead of dreaming of an enormous payday like they are splurging on off-the-counter stocks.’’
The Bank of Korea (BOK) measured individual borrowing at a record 922 trillion won (about $814 billion) at the end of June, representing a 10.9 trillion won increase from the preceding quarter. When combining debt held by the self-employed and non-profit organizations, the personal debt mountain soars above one quadrillion won and nears what the whole economy makes in a year.
According to data from Korea Exchange and the Korea Financial Investment Association, the country’s bourse operator, monthly stock trading volume remained below 100 trillion won for the fourth consecutive month in July.
Trade volume had been consistently above the 100 trillion won mark from March 2010 until the current streak, hitting a low of 81 trillion won in June. The market capitalization of the KOSPI also dropped 150 trillion won from a peak in May last year.
The declining asset values raise worries about further erosion in business investment and consumption. Sales at Korea's three major discount outlets dropped 8.2 percent in July from the same period in 2011, according to the Ministry of Strategy and Finance, marking the fourth consecutive month sales at the three outlet chains declined on-year.