The View | South Korea, Australia show rate cuts are no cure-all for property markets

US Federal Reserve chairman Jerome Powell didn’t spring any surprises on financial markets when he delivered a much-anticipated speech at the Kansas City Fed’s annual conference in Jackson Hole, Wyoming, on August 23. However, his affirmation that “the time has come for policy to adjust” was the strongest hint yet from the world’s most influential central bank that cuts in interest rates are imminent.

While other major central banks, including the European Central Bank, have already begun to reduce borrowing costs, the Fed’s policy shift is the most consequential for the rest of the world. This is especially so for Asia, where the spillover effects are more pronounced because of stronger trade and financial linkages with the US.

Speculation is swirling over which of the leading Asian economies, apart from China, will be the first to lower borrowing costs. For interest-rate-sensitive housing markets, shifts in monetary policy have a strong bearing on sentiment. Yet they are by no means the only factor influencing the performance and outlook for residential property. In some countries, it is not even clear whether interest rates can or should be lowered any time soon.

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.