IMF warns Korea of property market risk

Concerns are mounting that real estate loans may set off a series of risks as the housing market slowdown and global financial market uncertainty continue. The International Monetary Fund (IMF) noted in its April issue of the Global Financial Stability Report that the banking sector crisis triggered by the collapse of Silicon Valley Bank revealed vulnerabilities in the financial businesses and that the risk may worsen for months. As for the vulnerabilities in the non-bank financial sector in particular, the report cited the case of distressed project financing in Korea's property market, pointing out that concerns persist over possible risks and defaults due to falling housing prices.

Korea's non-bank real estate project financing sector is currently showing signs of distress with its risk exposure size and rising delinquency rates. According to the Bank of Korea (BOK), the risk exposure of the real estate project financing by non-banking financial institutions was 115.5 trillion Korean won as of September 2022, a two-to-four-fold increase in just five years across a variety of businesses. The delinquency rates have more than doubled in just nine months overall businesses, with securities companies climbing up to 8.2%. If the sluggish real estate market continues, a credit crisis may spill over to the second-tier financial sector from an increasing number of businesses faltering with distressed project financing.

Mortgage lending, which had been stagnant for a while, is also signaling an increase as home purchase sentiment is being rekindled with a series of housing loan deregulations and a sharp decline in mortgage rates. Around 40% of some 64,000 people who purchased a house in March 2023 were first-time home buyers, and the number of those in their 20s and 30s who bought an apartment complex was at a two-year high. Government pressure on banks to lower interest rates resulted in the floor rate of mortgage loans falling to the annual 3% range in just a year, rendering the BOK's efforts futile, which had raised the benchmark interest rate for seven consecutive times.

Mortgage loan late payment to major financial institutions breached one trillion won as of late 2022. If mortgage borrowing resurges, the number of financially-distressed households that are unable to repay loans will go up, risking even the whole financial sector. Already 5% of all indebted households in Korea cannot repay their loans even if they liquidate all of their assets. The ratio of such highly-distressed households exceeds 20% in the second-tier financial sector.

The government should be fully ready to prevent household mortgage debts or small-scale distressed project financing experienced by construction companies from morphing into a full-blown financial crisis by checking all possible risk factors and developing responsive measures. It should keep a close eye on non-bank financial institutions with high delinquency rates while being decisive enough to allow pre-emptive restructuring led by the private sector for project-financed businesses with high insolvency risk. We urgently need a solution that can induce a soft landing in the property market while reducing the ratio of real estate loans.


Hyoun-Soo Kim kimhs@donga.com · Do-Hyong Kim dodo@donga.com