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[Editorial] Preventing a Housing Market Collapse

Posted September. 18, 2008 07:00,   


The U.S. financial crisis has eased, with falling housing prices, the root cause of the crisis, stabilizing. Uncertainty lingers, however. Bank of Korea Governor Lee Seong-tae said yesterday, “The global economic crisis has just begun in the real economy.”

Korea’s financial market and real economy are not free from the aftermath of the global financial shock. Fortunately, the government believes Korea is unlikely to face a housing market collapse, which would trigger a financial crisis. Unlike U.S. financial institutions that provide loans equal to more than 70 percent of a home’s value, Korea’s lend up to half of a home’s value. Considering Korea’s high population density and densely populated Seoul metropolitan area, Korea is unlikely to face a plunge in housing prices.

Nevertheless, Seoul should not sit idle. Unless the maturity of existing loans is extended in a timely fashion, mortgage loans could trigger another crisis. The housing market also has two potential time bombs: more than 150,000 unsold and vacant apartments. The challenges in the housing market have put a heavier burden on real estate project financing, threatening the soundness of savings banks. The balance of project financing lending by savings banks is 12 trillion won (10.7 billion U.S. dollars), accounting for 16 percent. The delinquency rate last year did not significantly change, reaching 11.4 percent in June and 11.6 percent in December. The figure, however, soared to 14.3 percent at the end of June this year. In construction, rumors have spread that certain builders will go belly up due to project financing debt amounting to tens of billions of won.

Government policies to boost the housing market announced Aug. 21 included no measures for project financing or builders’ liquidity, intensifying financial worry. Financial authorities should come up with microeconomic measures to help the lower-income bracket buy houses and provide funds for construction companies while preventing a housing market collapse at the same time. The government will announce tomorrow policies to stabilize the housing market, and should include measures on how to deal with unsold apartments.

An all-out effort is needed to minimize the fallout from the global financial crisis. The Financial Supervisory Service says smaller companies that bought knock-in and knock-out (KIKO) currency options to avoid foreign exchange risks have suffered a combined loss of 800 billion won (716 million U.S. dollars) due to the weaker won. For example, the KOSDAQ-listed Taesan LCD suffered a loss of 80.6 billion won (72 million dollars) and filed for court receivership Tuesday. Given that, banks should not excessively strengthen lender qualifications to avoid putting more financial difficulty on smaller companies and households.