South Korea’s overheated property market to hurt economic growth in 2018 and 2019, warns ADB
The bank has revised growth projections down to 2.9pc and 2.8pc for 2018 and 2019 respectively, against the previous 3pc and 2.9pc
The Asian Development Bank has issued a fresh warning over South Korea's overheated property market ignited by loose credit policies in recent years.
The bank cautioned that growth in Asia’s fourth-largest economy would slow further this year and in 2019 not only because of the ongoing US-China trade war, but also due to the high degree of vulnerability from its housing sector.
The internal and external factors had warranted the ADB to lower South Korea's growth projection to 2.9 per cent from 3 per cent this year, and to 2.8 per cent from 2.9 per cent for 2019, according to its recent outlook report.
“Growth in Korea will be lower in both years as exports suffer under higher tariffs imposed by two of its largest trade partners,” the ADB said in the report.
“Elevated housing prices threaten severe growth downturns if prices reverse abruptly … Housing prices that have undergone sharp and sudden reversals, empirical studies showed, tended to be associated with longer and deeper slowdowns.”
The bank attributed the property risk with the country having the “least home affordability on price spikes” to prolonged accommodative monetary policies.
Following the September 13 real estate measures, the finance ministry and financial regulators indicated they will introduce a stricter and tougher set of metrics assessing bank lending to households and multiple homeowners in mid-October.
They are expected to enforce a system with revised ratios measuring personal credit risks such as loan-to-value and debt-to-income, as well as debt service ratio.
The government is likely to introduce “stronger standards” for the three metrics that would further limit banks and non-banking institutions from extending household loans, and simultaneously “squeeze” banks to boost their risk management under the capital adequacy rules.
Regulators are also expected to apply a stricter loan-deposit ratio that assesses banks’ liquidity, and a zero per cent loan-to-value ratio to existing homeowners, which bars them from borrowing completely.
All these measures – intended to restrict borrowings especially by existing homeowners – will make lenders reconfigure their capital adequacy to meet regulatory standards.
They were likely to speed up the enforcement ahead of their initial plan to bring stability to the real estate market and households, analysts said.
The debt service ratio examines individual’s loan history and portfolio including credit card debt, mortgages and repayment capability before extending credit. The debt-to-income ratio evaluates the individual’s ability to repay the principal and interest on mortgage requested and other existing loans.
The loan-to-deposit ratio – measuring a bank's total outstanding loans to its total deposits over a certain time period – is likely to be set below 100 per cent. A lower threshold would mean lenders will have more cash on hand for contingencies.
“When household debt increases in line with economic growth and development of the financial market, it can promote growth,” said Jean Lim, research fellow at the Korea Institute of Finance.
“However, if it grows too fast, it might dampen economic growth and hurt financial market stability. Excessive household debts increase repayment burden, limit private-sector consumption growth and might magnify downward pressure in case of a negative economic shock, thereby delaying a recovery.”