Extension of Household Loans Fanning a Sudden Increase of Housing Price

The research results said that the sudden increase of the housing price is caused by a low interest rate and an expansion of home equity loan.

According to the report of `Current issue and countermeasure` published by the Korea Research Institute for Human Settlements (KRIHS) on January 20, the household loans increased by the yearly average 30% after 2000.

In recent years, its gravity occupied in the household credit was raised to 74% from 60% in 1990`s. Also, the analysis said that the remarkable part of the household loan increase flowed in the real property market.

Especially, as 57% of household loan funds are used as the house-related funds in 2002, it was estimated that 25% of new loan funds of financial institutions flowed in the real property market.

Sog Gyeong-Hwan, researcher of KRIHS said, “When a self-developed real property market development model is applied and the household loan increases by 10%, the apartment price increases by 0.54%. among 27% of increments of the national house price between 2001 and 2002, the increment by the increase of household loan is estimated at 5% and the increment by the interest rate decrease is estimated at 8%.” KRIHS analyzed that the household bankruptcy is highly likely to be appeared rapidly when the business is depressed such as the decrease of the real property price.

Also, it is worried that there will be a vicious circle of △decrease of real property price →lack of collateral →additional collateral request of lending institution or repayment request →Increase in offerings →decrease of real property price.

Accordingly, it is indicated that the government must promote △the funds operation supervision strengthening of financial institutions, △soundness of housing fund loans, △Activation of home equity credit guarantee, and △actual user-oriented funds loan, as well as the restraints of household loans.

However, the sudden increase of interest rate must be executed carefully because it can have bad influence in a general economy and the problem of the vicious circles of the increase of principal & interest repayment of households →decrease of housing price →insolvency of financial institution.

Researcher Son said, “When the interest rate increases by 1%, it is estimated that the house price will decrease by 0.9%. Sudden increase of interest rate will impact on the households of large debts.”

Jae-Seong Hwang jsonhng@donga.com