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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Think4Yourself who wrote (53327)	7/12/2006 10:41:51 PM
From: mishedlo	Respond to of 116555

South Korea's Property Clampdown Threatens Homeowners, Growth July 13 (Bloomberg) -- bloomberg.com Han Jong Min and his wife began house-hunting when South Korean interest rates were at a record low. Eight months later, the couple can't afford to have a child as soaring mortgage payments eat up a third of Han's salary. ``My wife just got a job to help save our first home,' said Han, 33, who works in the purchasing department of food manufacturer CJ Corp. in Seoul. ``What's really worrying us is, what if home prices fall? We're preparing for the worst case of having to sell our home.' Buyers like Han have caused mortgage debt to almost double in four years and home prices to increase 40 percent, prompting President Roh Moo Hyun to raise taxes to curb speculation. A backlash from voters routed Roh's party in May elections, leading the president to replace his finance and budget ministers on July 3. ``We can't rule out the likelihood of a collapse in property prices,' said Park Duck Bae, an economist at Hyundai Research Institute in Seoul. ``Bursting the bubble will have a destructive impact on the economy as heavily indebted households will go broke.' The nation's highest interest rates in three years are dragging on an economy already restrained by near-record oil prices and a rising currency, Park said. South Korean homeowners are saddled with a record 201 trillion won ($212 billion) in mortgage debt, curbing consumer spending that makes up 60 percent of Asia's third-largest economy. Credit-Card Bubble The home-loan overhang echoes a credit-card bubble that burst in 2002 as Korean cardholders who'd borrowed beyond their means defaulted in record numbers. To make things worse, the once red-hot property market is showing signs of sputtering. A 112-square-meter (367-square- foot) apartment in Seoul's prime district is selling for 1.1 billion won, down 15 percent from peak prices, according to Real Estate 114, Korea's No. 1 property portal site. On March 30, Korea's financial regulator tightened bank lending rules for purchases of high-price apartments in some areas, its third round of measures in nine months aimed at curbing speculation. The Bank of Korea lent its support last month by unexpectedly raising borrowing costs for the fourth time since October, to 4.25 percent, the highest since May 2003. The rate increases have also hurt construction shares, which fell by an average 9.8 percent in the second quarter, compared with a 4.7 percent drop in the benchmark Kospi index. Joongang Construction Co. fell 43 percent in the period, while Daelim Industrial Co. and Hyundai Engineering & Construction Co. declined 23 percent and 12 percent respectively. At the end of March, households held a record 610 trillion won in combined debt. The ratio of financial assets to debt -- a measure showing individuals' ability to repay loans -- was 2.3:1, central bank figures showed on June 28. That leaves South Korean households vulnerable to higher rates and falling home prices. In the U.S., the ratio is 3.26:1; in Japan, 4.35:1. Declining Confidence Confidence among Korean manufacturers fell to an 11-month low in June on concern higher fuel costs and gains in the currency will curb exports and growth. Bank of Korea Governor Lee Seong Tae said on June 29 that the $788 billion economy's expansion in 2006 may fall short of the central bank's 5 percent forecast. Crude oil is trading near a record $75.78 hit on July 7 in New York, while the South Korean won has gained 6.5 percent against the U.S. dollar this year. Under new rules that took effect in April, people are unable to borrow to buy an apartment valued at 600 million won or more in government-designated speculative areas, if their annual payments on the loan principal and other loan interests exceed 40 percent of their annual incomes. South Korea also collects as much as half of the gains from redevelopment of old apartment complexes. Policy makers say such projects fueled the surge in housing prices. President Roh, who took office in 2003 with support from low-income earners, has pledged to stabilize prices. His government has doubled taxes for owners of the priciest properties and raised levies on profits from selling real estate. Household Strain ``A debilitating property crisis won't happen,' said Song Tae Jung, an economist with LG Economic Research Institute in Seoul. ``But the government's determination to cool the property market combined with the central bank's tighter monetary policy will put a strain on households and depress consumer spending.' The rising interest rates have weighed on overextended home buyers. Hana Bank, Korea's fourth-largest lender, raised its mortgage rates by 82 basis points to as high as 6.7 percent since the central bank delivered a surprise increase on June 8. The increase would cost homeowners with 100 million won debt an extra 820,000 won in annual interest payments. More than 80 percent of mortgages track moves in the yield of three-month certificates of deposit, which rose to 4.62 percent, the highest since April, 2003, according to Bank of Korea data. Homeowner Han took out 110 million won of bank loans in March to pay half the price of his three-bedroom apartment in southwest Seoul. He has to pay 800,000 won each month in principal and interest. ``My wife and I had never thought we would shelve our plan to have a baby because of our home,' Han said. ``We are just praying that the worst scenario of home value falling below the purchase price won't happen.'