Home News Analysis: South Korea’s sudden property slump tests world’s most indebted consumers

Analysis: South Korea’s sudden property slump tests world’s most indebted consumers

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Seoul, July 29 (Reuters)-South Korea’s real estate market has gone from a heat wave to a slump for some of the world’s most debt-bearing consumers as the sector is experiencing the fastest rate hikes ever. Suddenly under pressure.

Seoul apartment prices reported the sharpest decline in 26 months last week, but capital trading volumes fell 73% year-on-year in June.

The real estate market-related debt of 2.6 trillion won ($ 1.97 trillion) faces major challenges as borrowing costs rise, and increased slump and mortgage repayments could lead to weakening consumption. high. read more

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With nearly three-quarters of household wealth tied to real estate, policy makers are concerned that higher mortgage rates could lead to higher defaults and the economy could approach a financial crisis.

Ordinary Koreans are already feeling oppressive. For her 6-month-old 36-year-old mother, Jane John, who lives in central Seoul, the increased stress on her mortgage means she has to make some difficult choices. It means that it did not become.

“My husband’s salary isn’t enough to cover his monthly repayments, so he needs to shorten his maternity leave and get back to work,” said Chung, who initially planned a 15-month vacation.

Her family is currently paying 720,000 won a month for a 500 million won mortgage, but brokers will probably increase further by the end of the year, with a total monthly repayment of about 4 million won, or her husband’s. He said it would be 70% of the payment. ..

Financial regulators predict that when average mortgage rates reach 7% from the current 5-6%, the number of potential loan defaults will increase by 500,000 to 1.9 million. ..

Consumption of services and commodities from construction investment accounts for about 15% of economic activity, which, combined with sluggish real estate and a decline in exports, will severely impede growth. read more

“Korea’s financial system is one of the most vulnerable to rising interest rates in the world because it has one of the highest pandemic debt increases,” said Seo Young-soo, an analyst at Kium Securities. Said.

“Recently, those who have borrowed both mortgages and credit loans on top of it (for investment) are facing the most problems.”

Lots of downside

The Bank of South Korea has raised interest rates by 1.75 percentage points since August last year, including an unprecedented 50 basis point increase. read more

The policy rate KROCRT = ECI is widely seen to peak by the end of the year from the current 2.25% to 2.75%, and families in debt as local mortgage rates rise from their current nine-year highs. Will put more pressure on you.

Over the last five years, home prices in Seoul have more than doubled, starting with exciting home hunting and turning into entertainment for the people. read more

According to data from 36 major economies of the Institute of International Finance, South Korea’s household debt-to-GDP ratio was the highest in the world at 104.3% in the first quarter.

Regulators have sought to mitigate the impact of household debt on the broader financial system by providing borrowers with the opportunity to refinance their loans at fixed interest rates. That relief came just two weeks after BOK’s massive rate hike this month.

Finance Minister Choo Kyung-ho said earlier this week that he would “quickly improve the structure of household debt.” “Once the planned refinancing package is on track, the ratio of household debt to floating rates should drop by up to 5 percentage points from 78% to less than 73%.”

The ratio of debt to disposable income reached 206% at the end of last year, and household debt is now double the cost of living.

“Our apartment is everything we have, so we’re going to make it work,” Chung said. “I don’t want to move from Seoul”

($ 1 = 1,316.1100 won)

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Report by Cynthia Kim; Edited by Sam Holmes

Our criteria: Thomson Reuters trusts the principles.

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