Housing transactions in South Korea fell the most in at least six years as faltering economy reduced personal income, boosting expectations for further price declines in the property market.
Apartment transactions tumbled 21 percent from a year earlier to 720,000 units in 2012, posting the biggest fall since the related data began to be compiled in 2006, the state-run Korea Development Institute (KDI) said in a report on Monday.
The country's economic downturn decreased household income, leading to sluggish demand for homes and weak expectations for future price hikes, according to the KDI's empirical analysis. The economy grew the least in three years in 2012, and Bank of Korea ( BOK) cut its 2013 growth outlook to 2.8 percent, lower than the OECD forecast of 3.1 percent.
The dim outlook indicated the nation's real estate market would face further price declines in 2013, in contrast to those in the United States and China. Housing prices in Seoul and its suburban metropolitan areas maintained a downward trend last year, with those in Seoul falling 3.6 percent.
U.S. housing prices in 10 major cities increased 0.1 percent in the third quarter from three months earlier after falling 1.54 percent in the prior quarter, according to the report. Housing price growth in China accelerated to 6 percent in the third quarter from 2 percent in the second quarter on an on-year basis.
LONG-TERM RECESSION
South Korea's housing market has been feared to enter a long- term recession period due to structural problems such as aging population and retiring baby boomers as well as low growth. Demographic changes would slow the rising pace of population, resulting in the weakening of real demand for housing as places of residence.
The United Nations predicted South Korea to become a super-aged society in 2026 after making an aged society in 2018. The country already became an aging society in 2000. Societies whose proportion of those aged 65 and over surpasses 7 percent, 14 percent and 20 percent are called aging, aged and super-aged society each.
Population aging entails a fall in those aged 30-54, the major demographic group that buys homes. The group in South Korea was expected to peak in 2013 at 43.5 percent before falling thereafter. Ten years after the group in Japan peaked in 1986, land prices in Tokyo dropped to a quarter of their peak level.
Baby boomer retiring would trigger home downsizing as those born between 1955 and 1963 could sell large-size homes upon retirement to buy a couple of smaller ones, which can be rent to earn rental income. Price falls in the high-end, large-size homes may send shockwaves throughout the overall property market.
According to the finance ministry, there were 7.13 million baby boomers in South Korea as of 2010, taking up 14.6 percent of the total population. They will increase by 500,000 to 800,000 each year.
MONETARY EASING
The expected slow growth and lower housing prices may encourage the BOK to lower its benchmark interest rate further. " Expansionary monetary policy will help enhance financial and economic stabilities under the economic downturn in connection with the housing market slump," the KDI said in the Feb. 5 report.
According to the report, a 1 percentage point increase in the benchmark rate would drag property prices down by 2.8 percentage points. Monetary policy plays a pivotal role in boosting consumer confidence and expectations for economic recovery when economic downturn comes in connection with the housing market slump, the report said.
The BOK kept the benchmark seven-day repurchase rate on hold at 2.75 percent in January after cutting the rate by 25 basis points in July and October last year.
Expectations for additional rate cut spread after BOK Governor Kim Choong-soo said the monetary policy will be effective when it comes with the fiscal policy.
His comment was in line with speculation that the new administration under President-elect Park Geun-hye would unveil new stimulus measures after taking office on Feb. 25.
