Gangnam’s Estate Agents Yearn for New Tune

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Gangnam Style

Eumhouse, an estate agency in Seoul's wealthy Gangnam district, has seen a recent uptick in inquiries after two years of slow business in a stagnant property market.

This trend could be read as a positive response to the new government's measures to boost the economy – a program that the central bank aimed to support on Thursday with its first rate cut for seven months.

But Yoon Sunghoon, owner of Eumhouse, remains downbeat on the outlook for the property market. "The number of transactions is little changed despite the recent tax breaks for home purchases, because people don't expect house prices to go up," he said. "People ask: why should I buy an apartment when no one else does?"

Equity investors took a more bullish view following the Bank of Korea's decision to cut the base rate by 25 basis points to 2.5 percent. The Kospi index rose 1.2 percent, but this figure was far outstripped by the surge in construction stocks: GS Engineering and Construction rose 6.8 percent, while Daelim Engineering & Construction jumped 6.47 percent.

The share price movements reflect an improving mood towards the property sector, which has a crucial influence on consumer confidence and spending in South Korea, where three quarters of household wealth is held in real estate.

Apartment prices in Seoul have fallen by 8.3 percent over the past two years, according to KB Financial Group, as buyers reacted to weaker economic growth and a glut in the market following extensive residential construction in previous years.

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President Park Geun-hye, who took office in February, has put measures to support the ailing property market at the heart of her domestic economic policy – despite concerns that a bounce in homebuying could further increase a household debt pile that is already among the world's highest.

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Last month her government announced plans to deal with oversupply and weak prices by cutting the number of new public housing units added each year, as well as offering targeted exemptions from property acquisitions and sales taxes, and boosting government lending to homebuyers.

"The weak property market has been one of the key concerns for policy makers simply because it has been holding back consumption," said Ronald Man, an economist at HSBC. "The wealth effect of that market is particularly high in Korea when compared with the rest of Asia."

The Bank of Korea cited several factors behind its decision to cut rates: it noted weaker-than-expected growth in China – by far South Korea's biggest export market – as well as continued sluggishness in Europe, and low consumer price inflation, at just 1.2 percent in April.

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Not mentioned in its statement was pressure from a government that has made no secret of its desire for central bank support in its economic program. Over the past month, appeals for monetary easing, with varying degrees of nuance, have come from figures including the finance minister, a senior presidential secretary, and the parliamentary leader of the ruling party. Such pressure "may ultimately undermine the central bank's hard-earned reputation for independence", Mr Man warned.

The ability of either monetary or fiscal policy to spur output, in a country where exports account for more than half of economic policy, may prove limited, even in the property sector. Exports have remained under pressure, rising only 0.4 percent in the year to April, and the government has lowered its growth forecast for this year to 2.3 percent.

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"The market could get a temporary boost from the tax benefits and lower borrowing costs – but unless the economy improves, these measures will not be enough to prop up the market," said Kim Hyun-ah, a researcher at the Construction Economy Research Institute of Korea.

It is a sober assessment shared by the estate agents of Gangnam. "The trend is unlikely to change any time soon," says Shim Jae-hoon at Hanwool Real Estate. "We are getting more calls to inquire about prices but transactions aren't increasing. People are just looking for fire-sale deals."