Home price crash, an overriding concern
A possible sharp fall in housing prices that may buffet households and financial markets is fast emerging as an overriding concern of both government policymakers and private economists.
Yesterday, the country's finance minister, the top financial regulator and the central bank called in unison for lenders to take preemptive steps to manage risks of home-backed loans to brace for a potential bursting of what they see as a housing bubble.
Saying that the economy will likely slow down, particularly during the first half of this year, Finance Minister Kwon O-kyu said it was time for financial institutions to focus on risk management.
"Financial institutions have competed to expand their home-backed loans. Home loans now make up a large share of their total credit, which increased systematic risks in the financial market," Kwon said during a New Year celebration of Korean financiers yesterday.
Yoon Jeung-hyun, head of the Financial Supervisory Service, spoke in an even stronger tone.
"The volume of home-backed loans outstanding is at a risky level," he said. "Should there be a housing bubble burst like that in Japan in the 1990s and the United Sates in the 1970s and 1980s, there will be little finance firms left unhurt."
Lee Seong-tae, governor of the Bank of Korea, also said that financial institutions should concentrate on better risk management this year.
The policymakers' warnings are backed by a growing number of private economists who have already been raising alarm bells over a possible housing price crash, which they fear could lead to widespread personal and institutional insolvencies.
The possibility of a hard landing is growing, they said, amid policy measures to rein in the inflow of liquid capital into the housing market, such as higher reserve requirement ratio set by the central bank and tighter rules against mortgage loans.
The debt-to-income ratio for mortgage lending has been set at 40 percent throughout the banking sector while interest rates on housing loans are climbing.
"Toughened regulations against home-backed loans coupled with rising interest rates can be dangerous," said Park Jae-ryong, an analyst at the Samsung Economic Research Institute.
"Each policy measure has its reasons, but too many are enforced at the same time and this could bring trouble."
SERI said in a report released earlier that excess liquidity in the financial market will be largely dissolved thanks to a higher reserve requirement ratio, curbs on foreign currency denominated loans and mortgage loans.
"Should the reduced liquidity hold back housing prices, it could directly lead to insolvency of households and financial institutions," the report warned.
Japan's housing prices took a sudden drop as a spate of regulations including the cap on the amount of loans took place simultaneously, according to Park.
"Many say that Korea won't resemble the Japanese bubble burst, but once prices start going downhill, they are likely to, at some point, plummet."
He said that initially the overdue loan rate will rise, then consumption will slacken and financial institutions' bad assets will increase and have a negative macroeconomic effect,
Hong Soon-jik, a senior researcher at Hyundai Economic Research Institute, however, said that unlike Japan, Korean home prices will gradually stabilize downward and a prolonged stagnation will follow.
Hong forecasts that property prices will take a downward curve from 2008, when new home supply will expand in large quantities.
"Strong expectations on the supply of low-priced apartments promised by the government, harsher limits on housing loans and heavier property taxes are likely to pull down housing prices," he said.
LG Economic Research Institute pointed to the property bubble in the Seoul metropolitan area and rising household debts as signs of a downturn.
LG expects a slow fall of property prices spreading to an overall economic recession.
"Should the bubble break, sluggish demand and investment will continue, resulting in a chronic stagnation, weakened national competence and low credit ratings," the think tank said.
Economists noted that it is necessary to revise the recent policy measures which are driving up the possibility of a sudden crash of home prices. A mid- to long-term roadmap for housing supply and demand is most urgent, they said.
"Interest rates hike and controls against loans are fatal together," said SERI's Park.
Hyundai's Hong said continued housing supply expansion and eased control on old apartments in Gangnam slated for reconstruction would help stabilize the property market.
(sophie@heraldm.com)
By Lee Sun-young & Kim So-hyun
koreaherald.co.kr |
