International | May 30 2006
By Chris Shaw (Tokyo)
Over the past 20 or so years there have been a number of property bubbles in Asian markets, most famously in Japan in the 1980s and now seemingly in Shanghai.
Morgan Stanley economist Andy Xie suggests Korea is now on the verge of its own housing bubble, as on a measure of property value relative to income prices in Seoul are at twice the level of prices in Tokyo, which is regarded as one of the world’s most expensive cities. He also notes prices in Seoul have risen to about 50% of the peak level of prices in Tokyo, this surge being driven by a combination of an ageing population and an appreciating currency.
Returning from a visit to clients in Korea, Xie notes talk there was not based on the question of whether or not there is a property bubble but when would the bubble burst. Putting the market into perspective, the Seoul Property Index has risen 56% in the past five years and in Xie’s view could rise even faster in coming years, possibly making Seoul East Asia’s most expensive city.
He notes there are some economic similarities between Seoul now and Japan in the 1980s that have produced such a strong property market, including low levels of capital expenditure and a corporate sector that is performing strongly. When combined with an ageing population that is also becoming richer, the end result is strong demand for high level properties and an environment that encourages any excess liquidity to enter the property sector.
While the government has attempted to slow the market, Xie points out the measures to date have been ineffective and an effective resolution of the problem requires a better supply policy. One element of such a policy would be the creation of better infrastructure, as this would increase the number of desirable locations. At the same time there should be more development of high-end properties, as in his view this would help slow the rate of increase in prices.
If such a supply response is not taken the central bank is likely to be left only with the option of raising interest rates to slow the sector. Xie is against such a policy response as he sees the potential for the government to both solve its property market problem and further develop its financial sector and higher rates would make such an outcome more difficult.
He notes the Korean economy is entering a sustained period where the demand for financial assets grows as the population gets older and wealthier, so moves to develop a competitive financial sector would provide a boost not only to the South Korean industry but also to its standard of living, which is below average compared to OECD countries.
The issue for the Koreans is to avoid the mistakes of the Japanese in their property bubble, where the financial sector grew primarily thanks to loans on property and so struggled when that market boom ended. But by developing a stronger regulatory regime and limiting the potential for the housing bubble to suddenly burst by shifting the market focus to quantity rather than price, South Korea stands to come out of the current dangerous position with a much-strengthened economic base overall, as it would have a better financial system to go with its already strong electronics and automotive industries.
