55% of Real Estate Booms Lead to Bust:IMF
Korea Times
By Kim Jae-kyoung
Staff Reporter
times.hankooki.com
The economy is increasingly exposed to the risk of an asset market bust, as asset prices in Seoul and major cities have been soaring with idle money flowing into such speculation-prone areas for capital gains.
The Samsung Economic Research Institute (SERI) reported that recent price hikes in real estate are similar to the situation in Japan in the late 1980s before it encountered an unprecedented nosedive of property prices and a protracted economic slump.
It pointed out that with low interest rates, as much as 387 trillion won in bank deposits waited for investment in any profitable assets in April, up from 257 trillion won at the end of 2001.
This phenomenon is triggering concerns about the bursting of the asset price buddle soon. According to the International Monetary Fund (IMF)¡¯s new paper, an asset market bubble bursts more easily than stock market bubbles.
The IMF paper, based on its interview with Michael Bordo of Rutgers University and Olivier Jeanne of the IMF¡¯s Research Department, was released by the Bank of Korea yesterday.
The paper looked at asset price boom-busts in 15 OECD countries since 1970 and found a considerably lower incidence of stock market boom-busts than property price booms and busts.
The paper showed that out of 24 boom episodes in stock prices, only 4 were followed busts _ Finland (1989), Italy (1982), Japan (1990), and Spain (1990), while out of 20 booms in property prices, 11 were followed by busts.
Thus, the probability of a stock market boom leading to a bust was 17 percent, but the probability of a property price boom leading to a bust was 55 percent, the paper said.
In particular, the paper warned that asset price boom-busts tend to be more prevalent in small countries where the real estate market is concentrated in the capital or major cities, such as Japan, Netherlands and Britain.
It also said that banking crises tended to be associated with asset price boom-busts, noting that consumer price inflation and domestic credit declined with, or following, the property price bust, which provides evidence that asset price boom-busts have significant and deleterious effects on the macro-economy.
Criticizing the central bank for a recent cut in the call rate, Kim Kyeong-won, an executive director at SERI said a rate cut might lead to a situation such as the bursting of the real estate bubble in Japan.
``Given that there is ample liquidity in the market, a rate cut would encourage market participants to use the extra cash to buy apartments for capital gains, pushing up real estate prices,¡¯¡¯ he said.
Average apartment sale prices in Seoul shot up to an all-time high of 10.36 million won per pyong (3.3 square meters) on May 23, up from 9.9 million won last year, 7.66 million won in 2001 and 6.42 million won in 1999, according to Pudongsan 114, a real estate market survey firm.
The SERI pointed out that the various patterns in the local market, including the central bank¡¯s credit easing and the government¡¯s pump-priming measures centered on the real estate and construction sectors and a hike in home loans, have all followed in Japan¡¯s footsteps.
The balance of real estate-related loans at banks totaled 271.5 trillion won at the end of March, up 103 percent or 137.7 trillion won from the end of 1999, according to the central bank.
Meanwhile, the IMF paper said it is not desirable to take preemptive monetary action against volatile asset prices because restricting monetary policy implies a sacrifice of immediate macroeconomic objectives.
It suggests the central bank intervene in the real estate market through its interest rate policy only when it is convinced that wide fluctuations in asset prices would have a negative impact on prices of goods and services.
kjk@koreatimes.co.kr
05-26-2003 16:50 |
