Concerns Over Prolonged Housing Market Crisis... "Need to Adapt to Interest Rate Hikes and Maintain Policy Balance"

'Housing Market in Crisis: Diagnosis and Response' Seminar Held
Increased Risk of Real Estate PF Defaults... Liquidity Support Needed

On the afternoon of the 15th, panelists are discussing at the seminar "Housing Market in Crisis: Diagnosis and Response" held at the Construction Hall in Gangnam-gu, Seoul. / Photo by Kyungjo Noh felizkj@

[Asia Economy Reporter Noh Kyung-jo] Experts have suggested that the government should prepare balanced policies starting with liquidity support to prepare for the possibility of a complex crisis where the sales, housing, and financial markets all face difficulties simultaneously.

Heo Yoon-kyung, a research fellow at the Korea Research Institute for Construction Industry, stated on the 15th, "We need to prepare new funds or support measures for liquidity supply in anticipation of a prolonged housing market crisis."

At the seminar titled "Housing Market in Crisis: Diagnosis and Response" held at the Construction Hall in Gangnam-gu, Seoul, Heo said, "Even within the government's liquidity measures of 50 trillion won + 95 trillion won for market stabilization, the allocation ratio for stabilizing the Project Financing (PF) market should be increased."

According to the Bank of Korea's Financial Stability Report, as of the end of June this year, real estate PF loans amounted to 112.1 trillion won. Among these, the banking sector's share was 25.2% (28.3 trillion won), which is less than half compared to the global financial crisis period (68.6%, 52.5 trillion won). Instead, the non-bank sector's loan volume was larger at 84 trillion won.

Heo explained, "After the financial crisis, while strengthening the soundness of the banking sector, real estate financing concentrated more in riskier areas," adding, "With the introduction of international standards such as Basel III, PF loans have expanded to non-bank sectors."

He further elaborated, "The level of PF securitization is high, and there is a large amount of short-term funds such as Asset-Backed Commercial Paper (ABCP) and electronic short-term bonds, which increases the risk of default contagion," and "Maturities are concentrated in the first half of next year, and the rapid rise in interest rates makes response difficult."

This indicates a pattern where financial distress materializes with a time lag and continues for a long period. The financial crisis also broke out in 2008 and lasted until early 2014. At that time, the PF loan delinquency rate reached 9.91%. From November 2010 to February 2014, the delinquency rate remained above 5% for 3 years and 4 months. In the first quarter of this year, the delinquency rates related to real estate were 2.39% for mutual finance corporate loans and 1.84% for savings banks. The PF loan delinquency rate for savings banks was around 1.98%.

He warned that the contingent liability risk of unstarted projects with permits and refinancing risks (bridge loans) is also increasing. According to data received by Yoon Chang-hyun, a member of the National Assembly's Political Affairs Committee from the People Power Party, from the Financial Supervisory Service, PF loans handled mainly by capital companies dealing with bridge loans amount to 24.8 trillion won, and the delinquency rate is also rising.

Regarding this, Kim Yeol-mae, a research fellow at NH Investment & Securities who participated as a discussant, said, "Direct guarantees and borrowings by construction companies are also increasing," adding, "Liquidity risk does not end all at once."

She emphasized that if the current rapid pace of interest rate hikes is the problem, it is important to adapt to the raised situation going forward. There are voices calling for limiting or lowering the base interest rate next year.

Kim said, "I understand that at the G20 summit, there were discussions about not accelerating interest rate hikes too quickly," and added, "We must prepare strictly for when interest rate hikes stop in the future. We need to carefully check whether there are any problems with cash flow or profitability." She stressed the need to prevent this from leading to credit risk.

Regarding deregulation, she said, "It needs to be reasonable." She noted that if the perception during the previous government was that regulations would continue, causing housing prices to rise, now the market participants are delaying decisions because they believe regulations will continue to be eased.

Professor Ji Gyu-hyun of Hanyang Cyber University also emphasized the need for balanced policies. Professor Ji said, "The new government is trying to deflate the inflated balloon through supply expansion policies, but at the same time, unsold housing is increasing," adding, "While major policies are required, individual households should be given room to chase purchases during the housing price decline period." He also said policies should be viewed more from the perspective of mitigating macroeconomic shocks rather than just housing welfare.

The issues of bridge loans and main PF were compared to subprime loans and prime loans during the financial crisis. Professor Ji said, "The situation is worse than back then," and "It is difficult for the private sector to lead now. The public sector must bear the risk."

This content was produced with the assistance of AI translation services.