South Korea’s housing bill, passed by parliament earlier in April, has met with a cool reception from foreign investors and analysts.
The bill, which aims to contain residential house price growth that surged to 12.2% year-on-year in January 2007, would oblige house-builders to disclose their construction costs, and cap the profit margin on new properties.
However, Takahira Ogawa, Korea sovereign credit ratings analyst at Standard & Poor’s in Singapore, warned that the government is “walking a tightrope” between controlling credit growth and an overheated market on the one hand, and causing an outright crash in house prices on the other. Indeed, the Kookmin Bank national house price index has already slowed, to 11.6% year-on-year growth in March 2007, as increased reserve requirements and lower loan-to-value ceilings for commercial banks, enacted in late 2006, begin to take effect.
Richard Evans, who co-manages about £2 billion in equity assets in the Asia ex-Japan region for Martin Currie in Edinburgh, was more critical of the housing bill. “The government’s policy has been completely misguided for the past couple of years, and extremely negative for sentiment,” he told Emerging Markets. He believes that, rather than focusing on the demand side and targeting developers’ margins, the government would do better to take supply-side measures to address backlogs in the market.
That said, the prospects for the implementation of the bill are uncertain, given the ongoing disintegration of the ruling Uri party prior to the parliamentary election in April 2008. “Genuine support for this bill does not appear to be that strong, and the next government is likely to water it down significantly, if not to reverse it altogether,” Evans asserted.
In particular, he is anticipating renewed activity after the election in the redevelopment market, where developers form joint ventures with residents’ associations to upgrade aging housing stock. This segment was almost in suspension during 2006, due to anxiety over government policy, but Evans is optimistic for the post-election outlook. Combined with the government policy of sponsoring satellite cities to ease the burden on overcrowded Seoul, this supply-side approach should soften price pressures in the housing market while boosting the prospects for construction firms at the same time. Against this backdrop, Evans is confident that companies with relatively pure exposure to the real estate development market, such as Hyundai Development and GS Development, should prosper once the policy perspective becomes clearer in 2008.