[ANALYSIS] Korean investors disregard rate hike signals

[ANALYSIS] Korean investors disregard rate hike signals

Investors’ sentiment for real estate, stock remains strong

By Lee Min-hyung

Despite repeated warnings from the authorities, investors’ craze for the asset market here is showing no signs of abating amid prolonged currency depreciation induced by forecasts of excess post-coronavirus liquidity.

The Korean economy has proven its resilience after experiencing a 1 percent contraction in 2020 amid the global COVID-19 pandemic shock. With exports and a series of other key economic indices bouncing back at a rapid pace, the prevailing boom for investment in the real estate and stock markets is expected to remain in place throughout 2021.

Prices for apartments ― the most preferred type of residence in Korea ― are expected to continue setting new highs despite the latest signals of an interest rate hike, according to economists. Reviving exports will also help the benchmark KOSPI continue its bullish run with little risk of collapsing at least until the latter half of the year, they argued.

The Bank of Korea (BOK) has recently hinted at the possibility of starting to raise its key rate once or twice no later than the end of the year, in an apparent warning against the unprecedentedly overheated asset market.

The central bank has no choice but to deliver the gesture of possibly ending its year-long monetary easing to control the surging household debt and discourage investors’ appetite for the asset market.

The Ministry of Economy and Finance has also remained more aggressive in terms of its message of warning against the possible collapse of bubble in the market, urging the public and investors to stop engaging in a debt-driven buying spree of assets.

The Financial Services Commission (FSC) is also joining hands with the monetary and finance authorities, in their move to stabilize the market. FSC Vice Chairman Doh Kyu-sang said last week that an interest rate hike appears “imminent,” saying that the real estate market here will be hit hard by the global movement for monetary tightening in the post-COVID-19 world.

[ANALYSIS] Korean investors disregard rate hike signals

Bank of Korea Governor Lee Ju-yeol, left, shakes hands with Finance Minister Hong Nam-ki before having a breakfast meeting in Seoul, Friday. Yonhap

But data showed that investors pay little attention to the unceasing warnings from the authorities.

According to KB Kookmin Bank, the average apartment price nationwide surged 9.97 percent in the first half of 2021 from a year ago. Of note is the rapid rise in prices. The first-quarter increase surpasses the 2020 annual apartment price growth rate.

This indicates investors’ sentiment for real estate investment remains strong enough despite the cautionary messages from the authorities.

Market experts argue that there is ample chance for an additional surge in real estate prices in Seoul and its surrounding cities until the end of the year, even if the interest rate rises by 0.5 or 1 percentage point.

“Apartment supply in the capital will decline for the next few years, while demand for quality residences keeps rising,” a Seoul-based real estate expert said. “The biggest factor determining the price of the apartment is the supply. When housing supply is sufficient, the price will inevitably drop, but this will not be the case in the foreseeable future. It will be tough for the authorities to curb investors’ appetite for investment in the real estate market due to the weak supply.”

The stock market is also expected to continue its rally throughout 2021. A general consensus is that the benchmark index will rise to as high as 3,500 points by the end of this year on diminishing virus-related risks and the nation’s export rebound.

Late last month, the KOSPI reached a record high of 3,300 after hitting a low of around 1,400 in March 2020 when the global pandemic shock started weighing on the economy.

The growth has been driven by retail investors’ buying spree of local stocks, which sparked a nationwide stock investment boom amid the record-low interest era. Households have engaged in stock investment for the past year by taking loans at a low interest rate, and the trend will likely remain in place despite the possible rate hike, as most retail investors still consider the slight increase of the rate to not be burdensome.

Economists, however, advised investors to approach the asset market in a more careful manner after the BOK starts its rate hike.

“A possible key rate increase of 1 percentage point is a twofold rise from the status quo, which is not negligible at all, as the rate hike casts an impact on all aspects of the economy,” Yonsei University economist Sung Tae-yoon said.

Even if some investors play down the effect of the rate hike due to the currency depreciation, the government should not stop sending signals of a key rate rise and its impact on the asset market, as the gesture, in itself, helps minimize potential shocks in the market after the central bank actually does so, Sung added.

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