Property in Gangnam — a trio of exclusive districts in South Korea’s capital, Seoul — is beginning to buckle as the central bank’s year-long tightening cycle weighs on the luxury real-estate market.
Apartment prices in all Gangnam neighborhoods have declined for four consecutive weeks, data from the Korea Real Estate Board showed, portending the first monthly decline since the Bank of Korea (BOK) began raising its key rate in August last year.
The hit to Gangnam signals the effects of policy tightening is now reaching into the upper stratum of South Korea’s 51 million people.
Photo: AFP
While BOK Governor Rhee Chang-yong said that a housing correction was unavoidable and has a desirable element, concern over the property market and household debt are among factors that have prompted the central bank to return to smaller rate increases.
Gangnam apartments make up an overwhelming majority of Seoul homes factored into the Knight Frank Prime Global Cities Index, which has slowed after rising last year at the fastest pace since 2008.
The cooling momentum among the world’s most desirable and expensive 5 percent of homes coincides with the start of the US Federal Reserve’s rate increases and rising concern about a global recession.
“My expectation is that we will see the index’s rate of growth slow further in the third quarter as economic headwinds mount,” said Kate Everett-Allen, head of international residential research at Knight Frank. “But we expect our prime index to outperform our mainstream housing market indices where there is a greater reliance on finance and therefore more exposure to the rate rises.”
With Gangnam at its heart, Seoul’s prime real estate was Asia’s hottest in the past year, soaring 20.9 percent and outpacing Taipei and Tokyo, Knight Frank said.
Apartments tracked by Knight Frank include Raemian Dogok County, which costs up to 3.8 billion won (US$2.77 million) per unit, and Acro River Park, priced at as much as 22 billion won. Samsung Tower Palace 3rd traded for up to 7.5 billion won, Korean portal Naver showed.
Made internationally famous by Psy’s Gangnam Style music video, the districts symbolize wealth, status and chic among South Koreans. Their cluster of prestigious high schools and network of influential residents make the neighborhood a Mecca for the country’s elite.
Compared with a year earlier, home prices in Gangnam still grew in July, rising about 5 percent — the slowest pace since the spring of last year. It remains to be seen whether the downturn will last in the districts.
Still, when Gangnam falls, it tends to drop harder than many other areas. During the 2012-2014 downturn, Gangnam declined further than most of the rest of the country. Similar volatility was recorded during the 2008-2009 global financial crisis.
The incipient correction in luxury homes is not limited to Gangnam. The 50 premium homes picked nationwide by Kookmin Bank have fallen for two months in a row, data released last week showed.
The cooling is a clear sign that the central bank’s policy tightening is flowing through to property.
The BOK began its rate-hike cycle earlier than most developed economies as it grew concerned about financial imbalances. The country’s widening wealth divide, amplified by soaring home prices, fueled public anger and drove an electoral wave that helped South Korean President Yoon Suk-yeol oust Moon Jae-in in an election earlier this year.
Now, as home prices begin to fall, the tables are turning, but potential buyers are not rushing to brokers to try to secure a property.
The BOK’s rate rises and expectations of further tightening, together with the low volume of deals, are fueling expectations the downturn will be protracted.
“With households starting a deleveraging cycle, we expect housing prices to remain under pressure in coming years,” Nomura Holdings Inc economist Park Jeong-woo said.
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