Is South Korea in danger of repeating Japan’s economic bubble collapse?

2021.Sep.2.

 

Is South Korea in danger of repeating Japan’s economic bubble collapse?

Asia’s fourth-largest economy is experiencing soaring real estate prices and busy stock market trading that are raising fears of a correction, but analysts say underlying economic problems are the greater danger.

    

The prices of houses in the South Korean capital have increased almost 10% in the first half of the year

There are growing concerns that soaring real estate prices, an overheated stock market and worsening household debt in South Korea are combining to create an economic bubble — similar to the situation in Japan in the late 1980s — with the fear that when the bubble bursts, the whole Korean economy will also experience a comparable crash.

Japan's bubble was also rooted in real estate and stock markets. When the Nikkei stock market plummeted to half its previous value, the bubble burst and banks were left holding vast amounts of unrecoverable loans. The following years were known as the "lost decade" for Japan's economy.

Fearful of a similar scenario playing out, South Korea's financial authorities earlier this month requested that local banks reduce the number of unsecured loans they issue in an effort to put a cap on worsening household debt. The total amount owed by Koreans reached a record high of $1.51 trillion (€1.27 trillion) at the end of March, up an alarming 9.5% from one year earlier, according to the Bank of Korea.

New requirements

An effort to slow the growing debt by introducing new requirements for mortgage borrowers was attempted in April. But this failed to reduce demand as property prices continue to rise, primarily in Seoul and suburbs convenient for the capital. With potential buyers fearing they are being priced out of a home, more are taking our ever-larger loans to secure a property.

The average price of an apartment in Seoul increased by $87,000, or 9.7%, in the first six months of the year to reach a total of $977,124.

 

 

 

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South Korea house prices spiraling out of control

Authorities have stepped in to express their concern that a crash could be on the horizon, with Finance Minister Hong Nam-ki warning earlier this month that a "sharper-than-anticipated" correction in prices in the property sector could happen. Lee Ju-yeol, the governor of the Bank of Korea, echoed those fears by called property prices "over-rated."

There has been a similar rush to invest in the stock market, fueled by people taking out loans with record-low interest rates. Both the Kospi and Kosdaq markets have seen new highs in the last 18 months. Sensing that the risk was worsening, commercial lenders have suspended new loans for securities investments.

These relatively new issues are even more perturbing when coupled with the nation's fundamental economic problems: worryingly high levels of youth unemployment, a soaring national debt, and both the manufacturing sector and heavy industries witnessing declining fortunes.

And while analysts agree that soaring property prices and frenzied investing in the stock market need to be monitored, they say these systemic issues pose a far more significant risk to the nation's economic health.

Danger ‘over-stated'

"I have seen the reports about an economic bubble in Korea and the possibility of it bursting, but I think the danger is over-stated and the situation is not comparable to Japan's experiences in the 1990s," said Park Saing-in, an economist at Seoul National University.

"The biggest difference is that the bubble in Japan was in the commercial building sector, while here the growth in prices has been in the residential building sector," he told DW. "And while property prices are high in Korea, it's a similar situation around the world because of low-interest rates since 2018."

Some economists have played down the concerns over a possible economic crash

Indeed, the government has the tools at its disposal to deal with any challenges to the property market and is able to "control household debt very tightly," Park said, although he added that he does have concerns about other elements of the national economy.

"The biggest worry has to be the manufacturing sector, with traditional businesses now increasingly losing out to China, the US and even European countries," he said. "We have also seen rapid change in terms of the digital transformation and traditional sectors are very vulnerable to huge changes like that."

Problems in manufacturing — such as the auto sector, steel and shipbuilding — will inevitably have knock-on implications for employment. Even areas such as semiconductor manufacturing, where South Korea has traditionally been a world leader, are struggling to keep up with foreign competitors, Park added. 

Consumers' perspective

June Park, a political economist at George Washington University, concurs that the bubble in the property sector is unlikely to burst but that measures do need to be taken from a consumer's perspective to halt the rapid rise in prices and enable people to buy a home.

 

 

 

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"The authorities see the situation as an over-heating of the economy because people are borrowing so much for properties, and the fear is that they will not be able to pay those loans back," she said. "I agree that the government needs to act to stop the market over-heating, but whatever actions are taken I do not see prices leveling off in the near future, even if there is a new government after the election next year because it takes time to fix these issues."

June Park says the government needs to focus its attention on creating more jobs for the younger generations and be prepared to move away from the "fixation” on the manufacturing sector of the past.

 

 

 

2.

 

2020. jan.14.

 

Falling dragon: South Korea braces for economic chaos

With national debt rising, investment falling and many employment statistics in negative territory, there are concerns that Asia's fourth-biggest economy is in for a bumpy ride in 2020.

    

South Korea's Ministry of Economy and Finance announced in January that national debt has surpassed KRW700 trillion (€544.4 billion) for the first time in the nation's history.

South Korea's sovereign debt as of the end of November 2019 added up to KRW704.5 trillion with a month-on-month increase of six trillion won. Debt is up by KRW53 trillion in the last year alone, working out at KRW14.1 million for every South Korean man, woman and child. The increase was the sharpest on record with fiscal expenditures rising and tax revenues declining.

Statistics Korea is expected to release new employment figures, along with details on exports and investment in construction facilities, later this week.  Given the poor figures of recent months, economists are bracing themselves for more bad news.

Read more: Opinion: What China and the Koreas can learn from German reunification

Unemployment woes

Adding to Seoul's economic concerns, corporate investment has contracted every quarter since April-June 2018 and that trend is expected to continue when the figures for the last three months of 2019 are announced in late January.

The country's diminishing business appeal has seen foreign direct investment into South Korea tumble 13.3% to US $23.3 billion (€20.9 billion) in 2019. To complicate matters, government statistics show that workers went on strike more often than usual in 2019, losing 402,000 work days in total. According to the Korea Labor Institute, South Korea lost 43.2 work days per 1,000 workers to strikes, compared to only 3.1 days in the US and just 0.25 days in Japan.

Unemployment, a particular  concern in President Moon Jae-in's government, persists despite a number of target-based initiatives. People between the ages of 25-29 make up 21.6% of all unemployed people South Korea, the highest figure of all member states of the Organization for Economic Cooperation and Development.

'Deep depression'

Experts warn that Moon's government, which swept to power in May 2017 on the promises of more jobs and broader prosperity for South Koreans, is failing to fulfill its campaign pledge.

"I am very pessimistic. I believe that the economy is potentially at serious risk, for both domestic and external reasons," said Dr Park Saing-in, an economist at Seoul National University. "I have heard some people say that we will follow in Japan’s footsteps and experience two ‘lost economic decades' … I believe it will be worse," he told DW.

"The two situations are different in terms of the concentration of industry and big companies," he added. "If South Korea goes into a deep depression, that will trigger an economic crisis like we saw in 1997. It will be a systemic crisis."

Read more: Japan and South Korea determined to improve ties

Trade wars

The South Korean government, somewhat confident that the problems are merely a hiccup, has predicted that the national economy will grow 2.4% this year in contrast to 2% in 2019 — its most anemic growth since 2009.

But economists are skeptical, pointing to a number of factors beyond Moon's control. The trade war between China and the United States has dealt a severe blow to South Korea. More recently, a dispute with Japan over differing interpretations of their shared histories has spilled over into the trade arena, with Tokyo imposing restrictions on exports of chemicals that are critical to South Korea’s semiconductor industry.

The causes of the problems are not, however, all external. Immediately after entering office, Moon's government sharply raised the country's minimum wage and reduced maximum working hours in the hopes it would generate income led-growth. Instead, small and medium-sized companies, already operating on thin margins, were forced to lay off workers while others went bankrupt.

Widening gaps in equality

Moon's efforts to reduce the gap between the wealthy and the poor have not yet paid off. "The president promised to make South Korea fairer when he was elected," said Munseob Lee, a professor at the School of Global Policy and Strategy at the University of California San Diego.

"Korea also faces multiple structural issues," Lee added. "What concerns me most is labor market inequality. Among OECD countries, Korea has the highest gender wage gap and the eighth highest self-employment rate. That increased overall inequality and hinders the inclusive growth of the Korean economy."

Moon has also been hampered by a number of political crises since his rise to power. A nepotism scandal echoed the scandal that lead to the impeachment of the country's previous president, Park Geun-hye. Combined with the recent trade war with Japan, economic uncertainty has become even stronger than during the impeachment.

"I believe Korea's economy has strong fundamentals, but it is facing political and structural headwinds," said Lee.

Dwindling support

Moon's public support rate stood above 80% in his early months in office, reflecting broad belief in the promises that he made ahead of the election. Today, his support rate hovers around 48%, which is an improvement on the 40% recorded in the latter half of last year.

Economic concerns dominate South Korean media and public discourse but, with elections scheduled for April, ordinary South Korean people will soon have the opportunity to demonstrate their thoughts on the very issues that arguably affects them more than anyone else.

 

 

 

 

3.

 

2020.oct 15.

 

 

Global housing markets 'overheating' amid pandemic stimulus?

Despite the pandemic-induced global recession, house prices in major markets globally continue to rise. Many fear the market may be heading for a fall when stimulus packages launched by governments end later this year.

    

It's a paradox at the heart of the current crisis: Government stimulus packages designed to fend off wider economic disaster are actually helping widen housing market inequality, thus perpetuating a vicious cycle.

Such packages that pump cheap money into the economies of developed countries sustain high property and share prices. This underpins homeowners' borrowing power, guarantees shareholder profits and sustains banks balance sheets — but also simultaneously impoverishes renters and raises the numbers unable to get onto the property ladder.

Read more: A tale of two cities' housing crises: Dublin and Berlin

Many developed countries are seeing house prices rise even whilst coronavirus infection rates rise again. In the second quarter of the year, prices rose in eight out of 10 high- and middle-income countries, with US prices up 5% on a year earlier and Germany's up 11%, according to Swiss banking giant, UBS. 

Of the 25 major cities analyzed in its Global Real Estate Bubble Index 2020, over half are at risk of a housing bubble or are overvalued, UBS found. The typical signs of a bubble — decoupling of prices from local incomes and rents and excessive lending and/or construction activity — are starting to show.

Berliners saw their rents soar over the last decade forcing the city government to freeze rents for five years

Global hot spots

In North America, Toronto was the only major city at risk of a housing bubble, while Vancouver, Los Angeles, San Francisco, and New York were seen as overvalued, but not at risk of a bubble, UBS said. Boston was at fair value, while Chicago was the only city in the region considered to be undervalued.

Europe and Hong Kong face the greatest risk. German cities Munich and Frankfurt, as well as the Polish capital Warsaw, top the list.

Lithuania, Estonia, Poland, Slovakia and Ukraine have all posted double-digit price growth over the past 12 months. Paris, Amsterdam and Zurich are also in bubble risk territory, UBS said.

Read more: Berlin to freeze rents for five years

Other housing markets "overvalued but not at risk of a bubble" include London, Tokyo, Stockholm, Geneva, Tel Aviv, Sydney, and New York. Home values fell in just four of the 25 cities analyzed: Madrid, San Francisco, Dubai, United Arab Emirates, and Hong Kong. The last time there were fewer cities with negative price growth was in 2006.

 

 

 

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South Korea house prices spiraling out of control

Misplaced optimism?

Global real estate prices have held their own during the economic hit from the coronavirus pandemic, Sean Darby, global head of equity strategy at Jefferies, told US television station CNBC, adding that this was a "huge backstop" for policymakers.

"Importantly, it has really allowed the domestic banking system to be relatively unimpaired by asset deflation," he noted.

But residential house prices have been inflated for several years in most parts of the world. Economic logic suggests they should have collapsed after the financial crisis in 2008. Real house prices did in fact fall by 10% during the crisis but were saved by global central banks' cuts in interest rates almost to zero and huge fiscal stimulus programs.

This, in turn, triggered a new boom, sustaining an asset class that has been crucial to the post-2008 crisis financial sector. Low-interest rates make monthly mortgage payments more affordable and houses more attractive to buy, as they depress returns on alternative safe investments. Such support for household incomes, as well as mortgage-repayment holidays, also saves jobless workers from having to sell their homes.

Read more: Asian communities become scapegoats in New Zealand’s housing crisis

Like global stock exchanges, property markets have grown strongly during the current crisis, but unemployment has risen, and wages stagnated. Rising house prices sustain investment levels but are also a driver of inequality in the developed world, with higher prices and stagnating wages meaning nominally higher rents and more first-time buyers excluded from the property ladder.

The cheap-money policies launched by central banks such as the ECB are blamed for creating asset-price bubbles, including rising property prices

Unsustainable

UBS notes that price gains under conditions of government stimulus, mortgage bailouts and low-interest rates are unsustainable.

"It is uncertain to what extent higher unemployment and the gloomy outlook for household incomes will affect home prices. However, it's clear that the acceleration over the past four quarters is not sustainable in the short run," Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a release. "Rents have been falling already in most cities, indicating that a correction phase will likely emerge when subsidies fade out and pressure on incomes increase."

Bartosz Turek from HRE Investments also points to the "big correlation" between interest rates and housing prices, telling DW that he suspects this to be the main reason behind the soaring real estate prices in the world. "I see that at some European markets the prices went up so much that this is alarming, and a price fall is imminent," he said.

Turek notes that for a long time prices have been rising far more than incomes. This was often boosted by very low-interest rates in most countries.

Data sampled by the European Union's statistics office, Eurostat, show that between 2012 and 2019 house prices went up in Slovakia by 43%, while the average income of Slovak people went up just 4%within the period. In Germany, housing prices went up 43% while incomes rose 19%. In Sweden, prices soared 53% and incomes went up by 18%. In Austria, it was 45% and 17% respectively. Finally, in Hungary, housing prices nearly doubled and incomes were in 2019 43% higher than in 2012. 

Looking ahead

According to some housing market analysts, the second half of this year will be the test for the market, as government stimulus programs end. In the US, for example, over 20% of the 110 million renters are at risk of eviction, as moratoriums on rent payments due to Covid-19 restrictions begin to end.

"Looking ahead, a weak economy, tight credit conditions and the end of these short-term factors supporting demand will hold back growth in house prices next year," Hansen Lu at Capital Economics in London, told DW, and expects housing prices to stagnate in 2021.

Analysts for global ratings agency Fitch Ratings concluded that Spain will suffer the biggest fall in house prices, down between 8% and 12% in 2020, while Australian prices are expected to lose between 5% to 10%, and the UK up to 7%.

A fall in house prices would dent asset wealth, lower borrowing capacity of homeowners, and could undermine investment in productive parts of the economy. But it would also relieve pressure on those suffering from lower real wages, unemployment and rising rent.