Roundup: S.Korea's real estate market faces growing risks on falling prices
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E-mail Xinhua, October 31, 2012
South Korea's real estate market is facing growing risks on falling property prices, boosting concerns that over-indebted households may fall into troubles in repaying mortgage loans amid falling prices, a report by the central bank showed Wednesday.
According to the financial stability report submitted by Bank of Korea (BOK) to the National Assembly, apartment prices in the metropolitan area declined 2.7 percent during the January- September period. The prices tumbled 6.9 percent on average compared with the previous high tallied in September 2008.
Downside risk factors predominated in the property market due to a rise in unsold homes, a fall in major home buyers aged 35 to 54 and weakening sentiment over the real estate market caused by expectations for further price decline.
VICIOUS CIRCLE
The recent fall in home prices risked causing a vicious circle through the macro-financial linkages. Local lenders may urge mortgage loan borrowers to repay debts due to falling prices of real estate, or collateral. It will drive the borrowers to sell homes at a lower price for repaying debts, accelerating the falling pace of property prices.
Under the scenario of 20 percent home price decline, the home- backed loans classified as high-risk ones were estimated to triple to 93 trillion won (85.26 billion U.S. dollars) from 35 trillion won as of the end of March.
The high-risk loans refer to those breaching above the ceiling of 60 percent for the loan-to-value (LTV) ratio due to a decline in property value and repaying interests only with no payment of principals, some of which should be repaid on maturity.
JEONSE
Price rise in the so-called Jeonse raised financial burdens for homeowners. Jonse refers to the way of home lease unique to South Korea as a renter pay a lump-sum deposit on a rental home rather than paying monthly rent.
The ratio of rental fee to apartment prices in the metropolitan area surged to 55 percent in September from 40 percent in early 2009, according to the report.
If the apartment prices continue to fall, homeowners may fail to pay the lump-sum deposit to renters as the owners should pay both the mortgage loans and the deposits with money earned after selling homes at a lower price. The continued home price fall would add burden to homeowners.
HOUSEHOLD DEBT
The fall in home prices and the rise in rental fee boosted concerns over household debt problems in the country. Household debt growth decelerated recently amid the real estate market slump, but fragility in the over-indebted mortgage loan borrowers, self- employed and low-income earners deepened further.
Household credit, including loans from banks and non-bank depository institutions as well as credit purchases, grew 1.1 percent in the first half, the lowest in nine years. The ratio of household debt to disposable income dipped 1 percentage point on- year to 134 percent as of end-June, the first decline in eight years.
However, loans for self-employed increased sharply. Outstanding loans to self-employed were estimated at 430 trillion won as of the end of March, up 16.9 percent from 15 months before. The growth rate was higher than 8.9 percent for the overall household debt.
SELF-EMPLOYED DEBT
The faster growth came as the self-employed borrowed more loans amid worsening business conditions caused by weak domestic demand following the global financial crisis. The number of self-employed increased as baby-boomers joined the sector after retirement.
Due to an increase in retirees' participation, the proportion of self-employed debts by the elderly aged over 50 accounted for more than half of the total, boosting worries about the debt- serving capabilities. The elderly has relatively low ability to generate profits.
The loan structure for the self-employed was worse than wage earners. The average debt for the self-employed amounted to 95 million won, more than double 46 million won for wage earners, with the ratio of debt to disposable income for the self-employed reaching 219.1 percent, much higher than 125.8 percent for wage earners.
Self-employed debts are riskier due to a high proportion of commercial mortgage loans that are free from the LTV regulation. Self-employed loans, which have the LTV ratio above 60 percent, reached 27.6 percent of the total, higher than 13.3 percent for paid workers.
The central bank warned that the self-employed debts held higher default risks under the emergency situation as the debts are vulnerable to the economic conditions and the real estate market fluctuation.
LOW-INCOME EARNER
Debt-servicing capabilities by low-income earners aggravated recently due to an increase in borrowing from non-bank financial institutions that impose higher interest rates than banks. The ratio of non-bank loans of households that earn less than 20 million won a year accounted for 39.2 percent as of end-June, up 3 percentage points from six months before.
Delinquency in the low-income earners'loan has grown at a rapid pace this year. The default rate for loans of households with an annual income of less than 20 million won rose to 1.1 percent as of end-June from 0.6 percent at the end of 2011.
In addition, low-income earners with low credits saw their delinquency for credit card loans and apartment rental fee payments increase this year, the central said, warning that financial soundness in the low-income bracket worsened sharply.
OVER-INDEBTEDNESS
Over-indebted mortgage loan borrowers are facing growing repayment burdens due to falling real estate prices, the central bank said, noting that the falling prices raised the LTV ratio. The higher LTV ratio may encourage lenders to demand repayment from borrowers, who in turn sell homes at a low price.
Home-backed loans, which topped the ceiling of 60 percent for the LTV ratio, came in at 17.9 percent as of the end of June, up from 11.6 percent at the end of 2009. Mortgage loans that repay interests only without principal payment reached 35.3 trillion won as of end-March, accounting for 11.5 percent of the total.
Among the interest-only payment loans, around 28 trillion won worth of loans mature within two years. The rising pressure to repay debts was feared to hamper private consumption further amid worsening economic conditions that will reduce income growth for households. Endi
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