Sunday, October 7, 2018

In familiar pattern for S.Korea's Moon, property curbs backfire

07 October, 2018


SEOUL — Ms Park Soo-jin's plan was to cut expenses to bare minimum for the six years she rented a flat in a high-rise Seoul neighbourhood, so she and her husband could buy their own property in the area once the lease ends in December. It is not going to work.

The South Korean capital has turned into one of the world's hottest property markets despite nine rounds of cooling measures taken by President Moon Jae-in's government in the past year.

Making housing affordable for newlyweds and graduates was one of Mr Moon's key promises ahead of his election in 2017, along job creation and reducing inequality.

Economists say housing measures were long overdue as South Korea needs to curb household debt, now almost equaling the size of its economy — just as it did in the United States before the 2008 crash that led to the global financial crisis.

But some of the policies, such as tighter loan-to-value (LTV) ratios, tougher screening and various levies that discourage transactions and limit supply, are initially hurting those they actually intend to help in the longer run.

Many middle and lower-income buyers are now forced to make additional savings, with Seoul prices still growing at their fastest rate since 2006, up 6.9 per cent so far this year.

For Mr Moon, it's a familiar pattern: measures that aim to help his core group of voters have backfired and hit his ratings.

A 16 per cent minimum wage hike this year has contributed to the weakest job market in nearly nine years, hurting mainly the low-skilled and fuelling the inequality he promised to tackle.
"I believed this government when they said they will get rid of speculators. Now we're the ones who lose," said the 36-year-old teacher Park.

The price of Ms Park's dream three-bed flat in her Wangsimni neighbourhood has almost doubled to 1.2 billion won (S$1.5 million) since she moved to the area in 2012.

"I don't ever want to pay that price," she said.


Mr Moon's housing problem is mostly inherited: record-low interest rates and looser mortgage rules under his predecessor Park Geun-hye armed the market with ample liquidity.

An economy bleeding jobs has hurt the appeal of its stock market, and the weakness is forcing the central bank to keep interest rates low, making debt unattractive. Property, therefore, remains hot, regardless of the new rules.

Mr Moon's popularity touched a record low of 49 per cent in early September, with respondents in opinion polls mostly citing the economy and housing, according to Korea Gallup. Thanks to his third summit with North Korean leader Kim Jong-un, his popularity has since recovered somewhat to 61 per cent, still off his early highs.

"Runaway home prices and job losses are Moon's weak spot," Mr Park Won-gap, a senior analyst at Kookmin Bank said.

"His diplomatic efforts (with North Korea) are keeping his ratings relatively high, but that will head south again unless he can bring results in addressing jobs and inequality."


It now takes an average South Korean household 12.8 years of income to buy a mid-range Seoul home worth 616.7 million won, assuming zero expenses, data from KB Kookmin Bank shows.

When Mr Moon took office, Seoulites were looking at 10.9 years. Four years ago, 8.8 years.

First-home buyers now can only borrow 40 per cent of the home value under the new rules, compared with 70 per cent before.

The government is also encouraging banks to provide amortised loans, which are more expensive on a monthly basis than interest-rate only payments.

"Tougher rules came with good intentions but the loan restrictions pushed lower-income strata further away from housing markets," said Ms Lee Mi-yun, analyst at Real Estate 114 Inc, a research firm.

"It's hitting those without cash harder, especially as interest rates are set to rise further."


As part of his campaign to curb inequality, Mr Moon introduced higher property taxes on multiple home-owners, higher capital gains taxes from property transactions and new levies to discourage property hoarding.

But they had little effect, with high-income South Koreans still snapping up properties.

Prices of Seoul's high-end flats surged nearly 25 per cent year-on-year in the first quarter, the fastest rate worldwide, beating famously hot markets such as Hong Kong and Montreal, according to the Knight Frank Prime Global Cities Index.

Some even argue that going after the rich is in fact hurting those less well off: with higher capital gains taxes, multiple property owners are discouraged from selling, limiting supply in the market and driving up prices.

"The biggest blame should go to the increased sources of liquidity in general, not Moon's policies, but higher taxes under Moon did dry up transactions and boosted home prices," Mr Park at Kookmin Bank said.

Finance Minister Kim Dong-yeon said he doesn't yet see a bubble in the property market but vowed to take additional measures if speculative behaviour worsens.

"We are always ready to prepare policy responses if (speculative) movements seem to go against the government's stabilizing efforts," he said in an interview with foreign press last month.

The government has since announced plans to develop land for the building of 300,000 new homes and plans to relax restrictions to increase housing supplies in Seoul.

Still, the BOK's monthly consumer sentiment index for property prices shot up to a three-year high of 119 in September, reflecting optimism for further home price growth. 


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