Gov't Must Avert Full-Blown Financial Crisis

      November 11, 2022 13:34

      The government has lifted curbs on property purchases and housing loans except in parts of southern Seoul and Gyeonggi Province like Seongnam, Gwacheon, Hanam and Gwangmyeong. The curbs were imposed on a blacklist of real estate-speculation areas amid skyrocketing apartment prices and ended up covering half the country. They have been lifted because home prices are falling and the market came to a virtual standstill across the country. People who buy homes in an area that has been taken off the list can freely take out housing loans of up to 70 percent of the value of the property and are free of punitive increases in transfer and acquisition taxes. Apartment sales have halved so far this year. There are 1.79 million apartments in Seoul, but only 594 were sold in September, which was a record low. Prices in some areas south of the Han River have plunged around 30 percent. As of the end of September, the number of newly-built apartments that are empty rose 27 percent compared to August and three times compared to a year ago.

      An increase in empty new apartments leaves builders shouldering the costs. During the global financial crisis in 2008, 45 out of every 100 construction companies had to downsize due to a surge in empty new apartments and 30 second-tier banks went out of business. At present, financial institutions are owed W112 trillion by construction companies, and W70 trillion of the money came from brokerages, insurance companies and other subprime lenders. The housing market is triggering a credit crunch.

      A sharp drop in home prices could bloom into a financial crisis. The government needs to ensure a soft landing of housing prices. Removing restrictions on speculative zones is a start, but authorities should also consider slashing transfer taxes and other incentives to stabilize the market. Apartment prices could drop further if young Koreans who borrowed heavily to buy starter homes during the ultra-low interest period over the last few years start putting up their property for sale at knockdown prices because they can no longer finance their debts. The government needs to find ways to reinvigorate the market in order to help them sell their homes.

      The cryptocurrency crash could increase risks as well. A cash crunch at FTX, the world's third-largest crypto exchange, triggered a run on deposits, resulting in chaos in the global market, and Bitcoin, Ethereum and other leading cryptocurrencies have plummeted. The shockwaves of a bankruptcy at FTX could spread quickly to global financial markets.

      The domestic financial market remains unstable, and even a small flame can turn into a major fire. Financial authorities must learn lessons from the FTX crisis and check the financial conditions of domestic crypto exchanges. Preemptive measures are urgently needed.

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