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# 30 September, 2004
# The Korea Herald
# By Kim Jung-min




Real estate prices in Korea will continue to decline over the next few years. However, they are unlikely to plummet similar to the long-term decline Japan faced in the early 1990s, a local brokerage said in a recent report.
"A weak economic recovery, the ongoing de-industrialization process and the government's continued efforts to rein in property speculation will put house prices in a steep decline," said Shin Hu-shig, chief economist at Daewoo Securities Co.

Property prices nationwide for the past three months have continued to fall due to a series of government measures to cool the housing market since October last year. Shin expects prices to drop a further 8 percent over the next two years.

The tougher measures include a higher capital gains tax, lower loan-to-value ratio for mortgages and the introduction of a policy forcing housing sales based on fair market prices.

Despite the continuing decline in real estate prices, Shin ruled out the possibility that Korea will face a Japan-style property bubble burst for a number of reasons.

The property bubble in Korea is not as serious as that of Japan in the early 1990s, he said. Real estate prices in Korea jumped 80 percent between 2001 and 2003 whereas prices in Japan soared 300 percent in the seven years before the property market collapsed in 1991.

Moreover, housing demand in Korea is still high. During the real estate bubble period, Japan's home ownership ratio to population reached 110 percent. In contrast, the ratio in Korea was 86.3 percent at the end of last year.

"If you exclude those who own multiple houses, the actual home ownership ratio was only 54.2 percent," he said. Plus, Korean investors tend to be more risk adverse compared their counterparts in other developed economies and they have a strong preference for real estate assets to financial assets such as cash and savings deposits.

Given that real estate assets account for 83 percent of all Korean household assets, the continued fall in housing prices should result in a significant capital loss for households. That would lead to a slowdown both in consumer spending and construction investment, which would cut the country's potential economic growth, he added.

Consumer spending and construction investment are projected to drop 0.4 percent and 1.5 percent, respectively, over the next 12 months, according to Shin. The brokerage estimates the nation's gross domestic product growth rate overall will drop by 0.3 percent.

Shin also pointed out that a lackluster real estate market with low interest rates will prompt Korean investors, such as investment trusts, pension funds and insurance companies, to relocate their assets in overseas securities and government bonds.

"The impact of weak property prices on the local bourse, however, will be only limited as the market sentiment is more closely linked to the movements of overseas stock markets," said Shin.

(jungmin@heraldm.com)