Economy feels ripples of real estate rebound

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Economy feels ripples of real estate rebound

Jee Mi-Ja rented her son a home, paid back debt and had cash to spare after selling her apartment located southeast of Seoul for 470 million won ($437,000) in November.

The rebound in Korean home prices after an almost yearlong slump is improving the finances of people like Jee, a 59-year-old housewife, and bolstering the outlook for higher retail sales, faster loan growth and lower corporate defaults, according to Barclays. The bank’s top picks include E-Mart and Hana Financial Group, while JPMorgan and Goldman Sachs are bullish on builders and banks.

President Park Geun-hye’s administration pushed through tax cuts for homeowners in December as she seeks to support an economy that the central bank estimates will grow at the fastest pace since 2010 this year. The benchmark Kospi index rose more than 20 percent in 12 months after the start of housing recoveries in 2009 and 2005.

“The real estate market has finally started moving,” Scott Seo, the head of Korea equity research at JPMorgan Securities in Seoul, said last week. “Domestic demand-driven stocks look promising.”

Korean consumer shares are trading at bigger-than-average valuation discounts versus the broader market. The Kospi 200 Consumer Discretionary Sector Index trades at 7.8 times estimated earnings for the next 12 months, 20 percent less than the Kospi. That compares with an average discount of 4 percent the past five years, according to data.

The Kospi had dropped 3.1 percent this year through yesterday, versus a 4.4 percent decline in the MSCI Emerging Markets Index. The Kospi 200 consumer gauge slipped 1.2 percent, while a measure of the nation’s financial stocks lost 6.7 percent.

Thawing market

Korean home prices posted year-on-year gains for the past three months, rising 0.54 percent in January, the fastest pace since October 2012, data compiled by KB Kookmin Bank shows.

A total of 58,846 homes were traded nationwide in January, up about 117 percent from a year earlier, according to the Ministry of Land, Infrastructure and Transport. Prices are still the most undervalued among 26 countries tracked by the Organization for Economic Cooperation and Development, Barclays wrote in a Feb. 18 report.

Jee, who waited three years to find a buyer for her home, says three of her former neighbors have also sold in recent months.

“I really could feel the frozen market was thawing,” said Jee, who got almost twice what she paid for the home in 2000. “Thank God I could sell it this time.”

The property recovery, spurred by tax cuts on real estate purchases and the scrapping of levies on owners of multiple homes, may stoke gains in consumer confidence as wages rise and economic growth accelerates. President Park pledged in a televised speech yesterday to ease some regulations on new home trading.

“We expect 2014 to be the year we see a turnaround in the entire Korea economy,” said Chanik Park, the Seoul-based head of Korea research at Barclays. “Everything is linked to property.”

Average monthly incomes of South Korean households increased 2.1 percent from a year earlier to 4.16 million won in 2013, according to government figures. A gauge of household sentiment compiled by the central bank rose in January to the highest level since February 2011.

The Bank of Korea projects 3.8 percent growth this year, the fastest pace since 2010, when Asia’s fourth-largest economy was rebounding from the global financial crisis. Yields on the nation’s three-year debt have increased about 2 basis points this year to 2.9 percent.

“Expectations are spreading among investors that the market may benefit from the bottoming of the property market,” said Lee Nam-ryong, a senior analyst at Samsung Securities.

Debt burden

Disappointing earnings and a drag on exports from the weak yen spurred ABN Amro Private Banking to reduce Korean stock holdings to an underweight position at the start of 2014. Foreigners have pulled about $2.3 billion from the market so far this year.

More than 75 percent of Kospi index companies that reported fourth-quarter results have trailed analyst estimates, the highest proportion since 2006, according to data.

The won has strengthened 11 percent against the yen in the past 12 months, eroding the competitiveness of Korean exporters against their Japanese rivals.

“If I look at the company levels, I’m just a bit cautious,” said Daphne Roth, Singapore-based head of Asian equity research at ABN Amro Private Banking, which oversees about $207 billion.

Previous rallies in the property market have foreshadowed gains in stocks. The Kospi climbed 22 percent in a year after annual increases in home prices reversed a seven-month slump in November 2009. It jumped 28 percent after a recovery that began in June 2005, data compiled by Bloomberg and Kookmin Bank shows.

A revival in the housing market may help Koreans pay down debt and avoid record rental expenses. Home loans and credit extended to households rose to a record 1,021.3 trillion won at the end of December. Mortgage loans accounted for more than 60 percent of household debt borrowed from depository corporations in November, data from the Bank of Korea shows.


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