Is South Korea heading for asset bubble collapse?
Japan’s prosperity led to a rapid acceleration in asset prices some three decades ago, when house and stock market prices became “overheated”. After the bubble burst in 1992, Japan entered a long period of economic stagnation that left investors behind.
Today, as Korean household debt snowballs in sharply rising asset markets, from housing to stocks, critics have sounded the alarm and suggested Asia’s fourth-largest economy may follow in their footsteps. from Japan. A bubble burst is imminent here, they say.
Although experts are divided on whether the housing market has entered a bubble, the country’s fiscal and monetary policy leaders have indirectly acknowledged that it is at least close.
Finance Minister Hong Nam-ki recently warned that a “bigger than expected” price correction could occur, while Bank of Korea Governor Lee Ju-yeol said last month that prices of housing in the country had become “overvalued”.
“South Korea and the US real estate markets have entered a bubble,” said economist Han Sang-wan, former head of research at the Hyundai Research Institute.
“Real estate prices will continue to rise until the end of this year and next year and if the bubble bursts Korea will take a bigger hit than the United States,” he added. .
Median apartment prices in Seoul and other key metropolitan areas rose 11% between the start of the year and July, marking the largest increase in the cited period since the Korea Real Estate Board, run, began compiling data in 2003. The country’s capital, Seoul, earned nearly 100 million won ($ 87,000) or 9.7% in the first six months of this year for save 1.14 billion won, according to real estate data provided by KB Kookmin Bank last month.
Separate data from KB Kookmin showed average apartment prices in Seoul rose 19% year-on-year in July, hitting a 19-year high. It was only since 2002, when the corresponding figure stood at 23.1%, that apartments in the capital have been more expensive.
Commercial banks here have started to temporarily suspend all or part of their mortgages, wary of rapid growth in household credit and warnings from financial regulators of “strong” measures to tackle the problem.
The real problem, Han says, is the overheated housing market, rather than the stock market.
“Before every financial crisis in history – especially the 2008 subprime mortgage crisis – a housing bubble collapse has taken place,” Han explained.
“It hit the US and European markets the hardest because the economies of the time were weighed down by unprecedented growth in household debt,” added the expert. From 2001 to 2007, US mortgage debt – the largest component of household debt there – nearly doubled.
If a bubble is about to burst, Korea is in danger. The Korean household debt-to-gross domestic product ratio rose 7 percentage points to 90.3 percent at the end of the first quarter from the end of 2019, according to the Korea Institute of Finance. Credit to households rose to a record 168 trillion won year on year, or 10.3 percent in the second quarter, to reach 1,805 trillion won, according to central bank data released on Tuesday.
Growth has so far shown no signs of slowing, with people flocking to banks to buy homes on low-rate mortgages, fearing they will miss the opportunity as prices continue to rise.
“The national economy has always relied too much on the country’s real estate market,” said Seo Young-soo, analyst at Kiwoom Securities.
“House prices have jumped in the short term, which means that once prices start to fall, the damage will be colossal,” he added.
But those who are less skeptical say it is too early to label the current situation as a bubble.
“It’s the same story over and over again – we were concerned that the market would enter a bubble, collapse and enter a period of economic stagnation similar to that of Japan over the past 20 years,” said Joo Won, deputy director of the Hyundai Research Institute.
“As long as there is a solid supply of capital, the risk will not become too great and other global economies have been faced with the same overheated real estate market,” he added.
Stock market frenzy
Following in the footsteps of commercial lenders, some of the local brokerage firms have temporarily suspended their securities lending services. This was apparently due to the record outstanding loans granted by brokerage houses for equity investments. Total loans in this category broke the 25 trillion won mark for the first time on Aug. 13 and stayed there for four trading days, according to data from the Korea Financial Investment Association.
Although experts admit that the stock market may have entered a “bubble,” they say the current rally will be more resilient than the real estate boom.
“Under long-term expectations of labor market stabilization and inflation, the bubble is unlikely to burst easily,” said Lee Eun-taek, analyst at KB Securities.
“Despite warnings of a bubble, it is too early to abandon the Korean stock market and once the market gets over the tapering problems, it is expected to expand its growth.”
In recent sessions, the minutes of the US Federal Reserve’s July meeting – alluding to a decline as early as the fourth quarter of this year – have rocked the country’s main stock exchange, the Kospi.
The BOK has been hinting at a change in its monetary policy for some time now and is expected to broadly hike rates by 25 basis points at its next rate-setting meeting, scheduled for Thursday. It has maintained a record 0.5% interest rate for over a year now as the economy continues to struggle with coronavirus concerns.
The BOK’s rate hike is expected to suck excess liquidity out of the market, and while it will dampen the country’s snowball debt, investors should keep an eye on US monetary policy, Han warned.
“The first sign of a bubble collapse is a sharp rise in rates, which would cause an influx of dollars to the United States from world markets,” the expert said.
“But the US Fed hasn’t even started to cut back yet, so there is still time,” he added.
By Jung Min-kyung ([email protected])