In South Korea, for example, the mere expectation that borrowing costs will soon be reduced has contributed to a sharp recovery in property prices. Apartment prices in Seoul have shot up from a low in December 2022, following a brutal downturn triggered by the Bank of Korea’s (BOK) decision to raise interest rates to a 14-year high of 3.5 per cent.
Although South Korea’s inflation rate is moving back down to the 2 per cent target and domestic demand has weakened sharply – conditions that warrant a rate cut – maintaining financial stability is part of the BOK’s mandate. This makes it acutely sensitive to the country’s high level of household debt, the Achilles’ heel of South Korea’s economy.
Previous measures by the government to avert a full-blown housing crisis led to a sharper-than-expected revival in mortgage lending, which grew nearly 6 per cent in annualised terms last quarter. While not as strong as in the boom years of 2020-21, it was fast enough for the BOK to single out the revival in home values in Seoul at its policy meeting last month as one reason to be cautious about reducing interest rates.
Rhee Chang-yong, governor of the Bank of Korea, starts a monetary policy meeting at the central bank’s headquarters in Seoul on August 22. The Bank of Korea held its benchmark interest rate steady as authorities seek to rein in rising home prices that are fuelling household debt concerns. Photo: Bloomberg
“It’s the first time they mentioned prices in the Seoul area specifically,” said Jeong-woo Park, an economist for South Korea and Taiwan, at Nomura. It also shows the extent to which the risk of another house price boom is acting as a constraint on monetary policy despite low inflation and weak growth. The BOK is “in a tricky situation”, Park said.
It is made trickier by the fact that it is the government’s responsibility, not the central bank’s, to regulate the housing market. Although rules on mortgage lending have been tightened and efforts are being made to boost supply, policymakers are still struggling to prevent damaging booms and busts in the property market.
In Australia, by contrast, interest rate cuts are not even on the table. Earlier this month, the Reserve Bank of Australia (RBA) kept borrowing costs at a 12-year high, and even discussed the possibility of a further increase, because of persistently elevated inflation.
Even though it refrained from tightening policy as aggressively as other major central banks, the RBA is struggling to convince markets it will buck the trend of monetary easing this year by keeping rates higher for longer. Bond investors expect the RBA to start loosening policy in December.
Michele Bullock, governor of the Reserve Bank of Australia, speaks during a news conference in Sydney on August 6. Australia’s central bank has all but ruled out a rate cut in the next six months. Photo: Bloomberg
However, it is not monetary policy that is driving the country’s housing market. Even when the RBA was increasing borrowing costs last year, house prices were growing at an unexpectedly fast pace following a brief but sharp decline. “If it was just about interest rates, we would be in a deep downturn by now,” said Tim Lawless, Asia-Pacific executive research director at CoreLogic.
Supply and demand dynamics have a much stronger bearing on Australian property values. A housing affordability crisis, which intensified dramatically following the eruption of the Covid-19 pandemic, has accentuated long-standing policy failures on both the supply and demand sides.
In a submission in April to the People’s Commission into the Housing Crisis, Saul Eslake of Corinna Economic Advisory noted that the housing market has suffered the worst of both worlds. Since the mid-1980s, federal and state governments have focused on boosting demand as opposed to increasing supply. These demand-side policies ended up favouring investors over first-time buyers, partly because of changes to the tax system.
Blocks of flats are seen in the suburb of Meadowbank in Sydney. Australian house values have increased rapidly in recent years as record-low interest rates helped fuel demand despite warnings that such rises were unsustainable. Photo: Bloomberg
The sharp fall in home ownership has fuelled demand for rental accommodation, contributing to the deterioration in affordability amid a pandemic-induced surge in net overseas migration. Restrictive planning and zoning rules have compounded the crisis by stymieing the development of medium-density housing in desirable suburbs close to city centres.
Lower borrowing costs will do little to improve affordability and could even make matters worse. A major reform of Australia’s planning system, on the other hand, would go a long way towards tackling the underlying causes of the housing crisis.
As investors ramp up bets on the timing of interest rate reductions in Asia’s leading economies, South Korea and Australia provide a cautionary tale of the limits of monetary policy, especially when it comes to the housing market.
