Housing slump holds back rebound in South Korean economy

South Korea's worst property-market slowdown since 2004 threatens to limit the economy's rebound, as the government's stop-go policies to stimulate the housing market fail to secure any sustained revival.

Apartment transactions in Seoul plunged 80 per cent in July from June, when temporary acquisition tax cuts expired, according to data on the city's website. National home prices were flat or fell for 14 straight months to July, according to Kookmin Bank, the nation's largest mortgage lender.

Injecting life into the real estate market was a key goal for President Park Geun-hye when she took office in February. Tax breaks to spur demand and supply control measures to support prices were rolled out on April 1. Now a construction downturn is adding to the risk of the nation missing the government's 2.7 per cent growth forecast for this year amid patchy demand for exports and near-record household debt.

"South Korea's property market is sinking slowly, sapping the growth potential of the economy," said Oh Suk-tae, a Seoul- based economist at SG Securities. "Given the large share of household wealth in real estate and the heavy reliance on mortgages, consumers will continue to scrimp on spending unless property prices make a sustained upswing."

The weak housing market adds to the challenges for Asia's fourth-biggest economy. The Bank of Korea forecast on July 11 that growth will pick up from 2.8 per cent this year to 4 per cent in 2014, the fastest since 2010.

Finance Minister Hyun Oh-seok said in April when the government unveiled its property-boosting measures that a prolonged slump "can weigh on the entire economy".

In addition to the acquisition tax cut that expired in June, the government introduced tax breaks for first-time homebuyers with low incomes and for multiple-home owners subject to capital gains, both of which are set to expire at the end of the year.

The government is discussing how to cut housing purchase tax to "normalise" the property market, and will prepare steps by the end of August to be submitted to parliament.