December 24, 2022 08:14
The Bank of Korea on Thursday warned about a potential surge in homeowners who will be unable to service their debts as interest rates surge.
The BOK said many will not even be able to repay their debts if they sell the home they can no longer afford. Landlords too will fail to return their tenants' jeonse or Korean-style lease, it added.
Based on various simulations, the central bank concluded that if the key interest rate rises two percentage points from the level in June of this year, the delinquency rate among vulnerable borrowers would rise from 5.7 percent to 7.3 percent.
Vulnerable borrowers are people who have taken out loans from more than three different financial institutions and rank in the bottom 30 percent of the income bracket.
The key interest rate has already risen by 1.5 percentage points since then to 3.25 percent, so this scenario is just around the corner.
Another concern is that households could go bankrupt because the real estate market is in the doldrums. The BOK said a 20 percent drop in apartment prices from June could lead to 4.9 percent of 11.82 million indebted households becoming vulnerable.
In the jeonse market, if the current trend toward rentals continues, many landlords will be unable to give tenants back their deposits. Landlords typically use the money from new tenants to repay outgoing tenants, but now fewer and fewer people want to take a home on a deposit lease and prefer to pay monthly rent.
The BOK forecast that landlords will be unable to give back W30.44 million worth on average if jeonse prices fall 10 percent, and W76.42 million if they drop 30 percent (US$=W1,281).
The simulation suggests that 85.1 percent of landlords can repay deposits by selling other financial assets in case of a 10 percent decline in jeonse prices. But 11.2 percent of landlords simply do not have enough assets and 3.7 percent would be unable to do so even if they borrow money.
A 30 percent drop in jeonse prices would slash the proportion of landlords who have the money ready to just 68.6 percent, so 22.4 percent would have to sell assets to repay their tenants and nine percent would fail.
The BOK said housing loans amounted to 126 percent of Korea's GDP as of the end of September, while real estate-related financial exposure stood at W2.69 quadrillion or 1.26 times higher than GDP.
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