Last month, I wrote an article noting how the South Korean Government was looking to reinflate the housing market, which had stagnated over the past year or so and was beginning to weigh on consumption expenditure.
Yesterday, the Korean Government announced that it would provide tax breaks to home buyers and lower borrowing costs in a bid to revive home sales that have fallen to their lowest level since 2006. Under the scheme, first home buyers (FHBs) with annual incomes of less than 60 million won ($53,900) would be exempted this year from paying taxes on property purchases worth no more than 10 times their incomes, whereas capital gains taxes would be reduced for property investors. From Bloomberg:
The measures, which require parliamentary approval, are aimed at reversing a housing slump that Land Minister Suh Seoung Hwan says has gone on for too long. South Korea’s government last week cut its growth forecast to 2.3 percent this year from December’s 3 percent, and said they’ll unveil a supplementary budget soon.
“The government did pretty much everything they can to deregulate and make it easy for home transactions to increase,”said Jean Lim, an economist at Korea Institute of Finance.“Sales will go up in the short-term.”
Transactions fell 14 percent to 47,288 in February, the least for that month in seven years, according to the land ministry. Prices are also sliding, with values in Seoul lower than any time since March 2008. January’s total of 27,070 home transactions was the second-lowest for any month dating back to 2006, when the data was first released, land ministry data show…
Other measures announced today including a move to lower borrowing costs on state-supported loans to between 3.3 percent and 3.5 percent, down from 3.8 percent. The government will help refinance debt for some people facing credit default.
“A stagnant property market may be an increasing risk to the economy, financial markets and the low-income earners if such a downturn continues,” Suh said in Seoul today. “We will help spur the recovery through tax and financial support, while deregulating some of the rules imposed earlier.”
As noted last time, Koreans hold around 80% of their wealth in housing, compared with around 50% in most developed nations. As such, injecting life back into the housing market is considered essential if there is to be a recovery in both consumer sentiment and private consumption spending, both of which have fallen sharply since 2010, according to the Bank of Korea (see next chart).
However, South Korea’s high household debt is likely to constrain any housing recovery. According to the Bank of Korea, household debt to disposable income is tracking at around 135%, whereas South Korean house prices are expensive, currently valued at around six times incomes.
The proposed measures are also unlikely to bolster economic growth via igniting a construction boom. Korea’s planning system, like the UK’s, is highly restrictive with binding green belts encircling its major cities. Such restrictions limit urban expansion and raise land values, resulting in a housing supply system that is likely to be far less responsive to government policy and stimulus efforts aimed at boosting construction.
Ultimately, like the UK’s £130 billion Help to Buy scheme, South Korea’s proposals are destined to fail. While they may work to increase house prices in the short-run, thereby boosting consumption expenditure and confidence via the ‘wealth effect’, they will exacerbate current economic imbalances, pricing even more FHBs out of the market and leaving Korean households holding even higher levels of household debt.
