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S.Korea's real estate market faces growing risks on falling prices

English.news.cn   2012-10-31 11:40:39            

SEOUL, Oct. 31 (Xinhua) -- South Korea's real estate market is facing growing risks on falling property prices, boosting concerns that over-indebted households may fall into troubles in repaying mortgage loans amid falling prices, a report by the central bank showed Wednesday.

According to the financial stability report submitted by Bank of Korea (BOK) to the National Assembly, apartment prices in the metropolitan area declined 2.7 percent during the January- September period. The prices tumbled 6.9 percent on average compared with the previous high tallied in September 2008.

Downside risk factors predominated in the property market due to a rise in unsold homes, a fall in major home buyers aged 35 to 54 and weakening sentiment over the real estate market caused by expectations for further price decline.

The recent fall in home prices risked causing a vicious circle through the macro-financial linkages. Local lenders may urge mortgage loan borrowers to repay debts due to falling prices of real estate, or collateral. It will drive the borrowers to sell homes at a lower price for repaying debts, accelerating the falling pace of property prices.

Under the scenario of 20 percent home price decline, the home- backed loans classified as high-risk ones were estimated to triple to 93 trillion won (85.26 billion U.S. dollars) from 35 trillion won as of the end of March.

The high-risk loans refer to those breaching above the ceiling of 60 percent for the loan-to-value (LTV) ratio due to a decline in property value and repaying interests only with no payment of principals, some of which should be repaid on maturity.

Price rise in the so-called Jeonse raised financial burdens for homeowners. Jonse refers to the way of home lease unique to South Korea as a renter pay a lump-sum deposit on a rental home rather than paying monthly rent.

The ratio of rental fee to apartment prices in the metropolitan area surged to 55 percent in September from 40 percent in early 2009, according to the report.

If the apartment prices continue to fall, homeowners may fail to pay the lump-sum deposit to renters as the owners should pay both the mortgage loans and the deposits with money earned after selling homes at a lower price. The continued home price fall would add burden to homeowners.

Editor: znz
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