It may surprise many readers but Korea is churning out millionaires at the fourth fastest rate in the world with the number having hit 118,000 recently and rising. While the stock market and business have contributed greatly to this number it is the country’s booming real estate while seems to have been the main catalysts to the ever growing number of High Net Worth Individuals (HNWI). For the record, HNWIs are those who have in excess of $1,000,000 of net assets when excluding their primary residences and consumables.
A recent report by Merrill Lynch shows that the growth in the number of HNWIs was around 19 percent in 2007 which is significantly faster than the average growth rate of 6 percent around the world. As the property market seems to be the main element of this explosion in wealth in Korea the market has now caught the eye of international investors.
However, there are many factors to look at before diving head first into a market which has been something of a mystery for international investors in the past.
Korea
To say that Korea has something of a colourful past would be an understatement with conflict and internal unrest common place for literally hundreds of years. The country is situation is East Asia and borders China, Russia and Mongolia. For any years there was, and continues to be, much friction between the East and West something which eventually led to the splitting of the country into North and South Korea in 1945.
Russia took affective control of North Korea while the US government came in with heavy backing for the South Korean authorities leading to two very different economies and two very different styles of government.
While there have been increases in the value of property in North Korea it is the South Korea market which has attracted the most attention from property investors. This is because of the western style of government and the heavy emphasis on a free market economy and one which allows substantial overseas investment.
Economy of South Korea
It may surprise many to hear that South Korea has the 3rd largest economy in Asia and the 13th largest in the world by GDP. After the spitting of the country back in 1945, South Korea was the recipient of massive financial aid from across the western world with the US leading the way. This led to a period of economic growth the speed and strength of which has never been replicated in the modern world. The country literally moved from a very poor, but developing country, to one of the wealthiest in the world in a very short space of time.
As you might expect, this massive growth in the economy introduced new problems to the mix with inflation initially out of control and the income of the population in no way reflecting the country’s new fund wealth. Friction in the employment market led to a number of high profile strikes and instigated a number of increases during the 1980s and 1990s with the result that the average annual household income in South Korea in 2007 was in the region of $42,108.
Property
This new found wealth has been bubbling under the surface for some time and slowly we have seen property assets as a percentage of total wealth creeping up in South Korea. The figure is now in the region of 40%, which shows the demand for property in the region, and set against the global average of just 14% further emphasises the fact.
As you might expect, a buoyant global worldwide economy led to a very strong South Korea economy and consequently greater interest from local and international property investors. House prices have increased nearly 25% over the last 5 years and over 60% over the last decade but this does not reflect the growth in the so called ‘Bubble Seven’ districts in southern Seoul where returns have been well in excess of the country’s average, but times seem to be changing.
Current climate
It has been revealed that the South Korean authorities are to take action to ensure that the country does not fall victim of the worldwide credit crunch but for many in the property market in and around Seoul this is all too little too late. These property bubbles have seen property values collapse by as much as 20% this year so far with more pain expected for the rest of the year and into 2009.
The moves announced by the authorities include plans to introduce tax breaks to builders acquiring land, raising price caps on apartments, amending the maximum height restrictions and reducing the minimum property ownership period on new homes. There are also plans for state groups such as the Korea National Housing Corp and Korea Housing Guarantee to acquire unsold properties at anywhere upwards of 70% of their true market value.
In deed it was suggested by a government official that the property bubble which has gripped some areas of the country has pushed property prices to levels which are up to 30% over valued on a more traditional valuation system.
Conclusion
While the growth experienced by South Korea in recent times has been remarkable to say the least it seems as though the party may be coming to an end for the country’s ever growing band of property millionaires. The property bubble in Southern Seoul is the most alarming as this has the potential to set the market back many years. The government’s move to mop up unsold properties will take some excess out of the market but at some stage you would expect this to be drip fed back into the property sector, something which could cause a drag on future property price increases.
Debt levels in South Korea are also a major concern going forward and it appears that the government may have been a little too lax in its stewardship of the property market over recent times. However, while the short term outlook is bleak, South Korea still has the basis of a firm economy and long term interest from overseas investors which should see markets bounce back in due course.