ID :
30895
Tue, 11/18/2008 - 18:30
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https://oananews.org//node/30895
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(News Focus) S. Korea`s housing slump unlikely to spark crisis
By Nam Kwang-sik
SEOUL, Nov. 18 (Yonhap) -- The prolonged downturn of South Korea's housing market is not expected to trigger a major U.S.-style crisis in light of the nation's low mortgage default rate and rigid regulations on home-purchase financing, market watchers say.
Concern has been escalating that the protracted slump of Asia's fourth-largest
economy may eat deep into household income and erode homeowners' ability to repay
their mortgages, touching off a serious financial crisis.
"The market slump is unlikely to lead to a mortgage crisis due to tight
regulations on home financing and the low default rate for household loans," said
Kang Min-seog, a researcher at Meritz Property and Financial Institute.
During the previous government, South Korea introduced a set of measures such as
the loan-to-value ratio (LTV) and the debt-to-income ratio (DTI), in a bid to
curb housing speculation. The country's maximum LTV and DTI stands at 60 percent
and 40 percent, respectively.
LTV refers to the percentage of a mortgage to the property value, and DTI is the
portion of a borrower's monthly gross income that goes toward paying mortgages.
The default rate for household loans by local lenders stood at 0.53 percent as of
the end of September, while outstanding household loans by local lenders came to
507 trillion won (US$359.6 billion), according to data by the Bank of Korea and
the Financial Services Commission (FSC), the nation's financial regulator.
As of the end of September, home-backed loans reached 235 trillion won, or 46
percent of total household lending.
Despite the low possibility of a mortgage crisis, a rising inventory of new homes
is fueling speculation that a chain of possible bankruptcies of local builders
could put the country's financial system in hot water.
The number of unsold newly built apartments reached 157,291 units as of the end
of August, while home transactions fell to 27,333 in August from 46,629 in March,
according to government data.
In the first nine months of the year, eighty-eight small and mid-sized
construction companies went belly-up, up 17.3 percent from a year earlier.
The latest victim of the housing market slump is Shinsung Engineering &
Construction Co., a local mid-sized builder. The company on Wednesday asked a
Seoul court to reschedule its debt.
In the wake of the builders' application, the FSC announced a decision to extend
financial support to Shinsung Engineering's subcontractors to prevent a chain of
bankruptcies.
With the home market slumping, embattled small and mid-sized builders have begun
downsizing their operations by selling non-core asset and affiliates to combat a
cash crunch.
The Lee Myung-bak administration has announced a spate of steps to stimulate the
property market since its inauguration in February, like the construction of new
towns near Seoul, elimination of regulations on home transactions, property tax
reforms and repurchase of unsold homes.
As part of their efforts to keep faltering local builders from going burst, the
government and local banks are encouraging them to join a program to extend
financial support by identifying nonviable companies and viable ones.
However, there are growing concerns that large amounts of property project
financing loans extended by savings banks may turn sour as their default rate has
been on the rise since the end of 2006.
Such property project financing loans came to an outstanding 12.2 trillion won as
of the end of June, accounting for a fourth of their total lending. The default
rate rose to 14.3 percent as of the end of June from 10.4 percent at the end of
2006, according to the financial watchdog.
But Samsung Economic Research Institute, a leading private economic think tank,
said in a recent report that there is a very low chance of a project financing
crisis, given such loans take up only 5.3 percent of savings banks' total
lending.
"The ratio of property project financing to their total lending is very lower.
Though the default rate for the loan at local builders rises, it may have little
impact on the financial markets," said Chang Jae-chul, the architect of the
report.
Although no immediate crisis is predicted, market watchers paint a gloomy picture
of the local housing market as the country is widely expected to slip into a
deeper slump amid the downturn of the global economy.
Most real estate experts predict the housing market is expected to remain
sluggish for at least one year.
In a mid-October survey of 60 property experts conducted by the Korea Chamber of
Commerce & Industry, 67 percent predicted the housing market to turn for the
better only after 2010, while 33 percent forecast it may recover from the current
slump in the second half of next year.
With the market swamped in a slump, home prices are also predicted to fall down
the road. The average home price could fall by 5 percent to 10 percent next year
if the country's economy fails to recover, according to the Construction &
Economy Research Institute of Korea.
ksnam@yna.co.kr
(END)
SEOUL, Nov. 18 (Yonhap) -- The prolonged downturn of South Korea's housing market is not expected to trigger a major U.S.-style crisis in light of the nation's low mortgage default rate and rigid regulations on home-purchase financing, market watchers say.
Concern has been escalating that the protracted slump of Asia's fourth-largest
economy may eat deep into household income and erode homeowners' ability to repay
their mortgages, touching off a serious financial crisis.
"The market slump is unlikely to lead to a mortgage crisis due to tight
regulations on home financing and the low default rate for household loans," said
Kang Min-seog, a researcher at Meritz Property and Financial Institute.
During the previous government, South Korea introduced a set of measures such as
the loan-to-value ratio (LTV) and the debt-to-income ratio (DTI), in a bid to
curb housing speculation. The country's maximum LTV and DTI stands at 60 percent
and 40 percent, respectively.
LTV refers to the percentage of a mortgage to the property value, and DTI is the
portion of a borrower's monthly gross income that goes toward paying mortgages.
The default rate for household loans by local lenders stood at 0.53 percent as of
the end of September, while outstanding household loans by local lenders came to
507 trillion won (US$359.6 billion), according to data by the Bank of Korea and
the Financial Services Commission (FSC), the nation's financial regulator.
As of the end of September, home-backed loans reached 235 trillion won, or 46
percent of total household lending.
Despite the low possibility of a mortgage crisis, a rising inventory of new homes
is fueling speculation that a chain of possible bankruptcies of local builders
could put the country's financial system in hot water.
The number of unsold newly built apartments reached 157,291 units as of the end
of August, while home transactions fell to 27,333 in August from 46,629 in March,
according to government data.
In the first nine months of the year, eighty-eight small and mid-sized
construction companies went belly-up, up 17.3 percent from a year earlier.
The latest victim of the housing market slump is Shinsung Engineering &
Construction Co., a local mid-sized builder. The company on Wednesday asked a
Seoul court to reschedule its debt.
In the wake of the builders' application, the FSC announced a decision to extend
financial support to Shinsung Engineering's subcontractors to prevent a chain of
bankruptcies.
With the home market slumping, embattled small and mid-sized builders have begun
downsizing their operations by selling non-core asset and affiliates to combat a
cash crunch.
The Lee Myung-bak administration has announced a spate of steps to stimulate the
property market since its inauguration in February, like the construction of new
towns near Seoul, elimination of regulations on home transactions, property tax
reforms and repurchase of unsold homes.
As part of their efforts to keep faltering local builders from going burst, the
government and local banks are encouraging them to join a program to extend
financial support by identifying nonviable companies and viable ones.
However, there are growing concerns that large amounts of property project
financing loans extended by savings banks may turn sour as their default rate has
been on the rise since the end of 2006.
Such property project financing loans came to an outstanding 12.2 trillion won as
of the end of June, accounting for a fourth of their total lending. The default
rate rose to 14.3 percent as of the end of June from 10.4 percent at the end of
2006, according to the financial watchdog.
But Samsung Economic Research Institute, a leading private economic think tank,
said in a recent report that there is a very low chance of a project financing
crisis, given such loans take up only 5.3 percent of savings banks' total
lending.
"The ratio of property project financing to their total lending is very lower.
Though the default rate for the loan at local builders rises, it may have little
impact on the financial markets," said Chang Jae-chul, the architect of the
report.
Although no immediate crisis is predicted, market watchers paint a gloomy picture
of the local housing market as the country is widely expected to slip into a
deeper slump amid the downturn of the global economy.
Most real estate experts predict the housing market is expected to remain
sluggish for at least one year.
In a mid-October survey of 60 property experts conducted by the Korea Chamber of
Commerce & Industry, 67 percent predicted the housing market to turn for the
better only after 2010, while 33 percent forecast it may recover from the current
slump in the second half of next year.
With the market swamped in a slump, home prices are also predicted to fall down
the road. The average home price could fall by 5 percent to 10 percent next year
if the country's economy fails to recover, according to the Construction &
Economy Research Institute of Korea.
ksnam@yna.co.kr
(END)
