"Real Estate Finance Risk Exposure Increased by 43% in 5 Years... Need for Preemptive Risk Management"

[Asia Economy Reporter Seo So-jeong] As the global trend of financial tightening is expected to strengthen, increasing the likelihood of stagnation or recession in the real estate market, there are calls for proactive monitoring and preemptive management of risks related to domestic real estate finance.

On the 22nd, Shin Yongsang, Director of the Financial Risk Research Center at the Korea Institute of Finance, stated in the report "Current Status of Domestic Real Estate Finance Risk Exposure and Risk Management Measures" that "Rather than expanding the scale of risk exposure in the market through overall loan regulation relaxation, a gradual approach aimed at normalizing the existing rigid regulatory system to block the spread of risk-seeking tendencies is an effective approach for stabilizing the real estate market and financial system."

According to statistics from the Bank of Korea, the total risk exposure scale of domestic real estate finance reached 2,566.4 trillion KRW at the end of last year, a sharp increase of 42.8% compared to 1,797.1 trillion KRW at the end of 2017.

The annual growth rate has also accelerated, rising from 6.9% in 2018 to 7.6% in 2019, 10.4% in 2020, and 12.4% in 2021.

Director Shin explained, "The rapid increase in the scale of domestic real estate finance risk exposure appears to be mainly due to the inflow of abundant market liquidity, driven by the real estate market boom and prolonged ultra-low interest rates, into the real estate market and related financial investment product markets in pursuit of high returns."

At the end of last year, loans from financial institutions accounted for 52.0% (1,341.6 trillion KRW) of the total real estate finance risk exposure, with the non-bank sector's share rising by 4.4 percentage points over five years to 44.1% (591.5 trillion KRW).

As real estate-related loan regulations have been strengthened mainly in the banking sector, high-risk loans in the non-bank sector have increased significantly, leading to a deterioration in the qualitative aspect of real estate finance.

Director Shin noted, "With the significant expansion of interconnectivity in domestic and international financial markets, the increased proportion of high-risk non-bank real estate finance has greatly expanded the degree of risk transmission between sectors compared to the past."

He added, "There is a continued tendency to pursue high returns centered on specific regions. Rather than expanding the scale of related risk exposure through overall loan regulation relaxation, it seems necessary to maintain and supplement measures such as Loan-to-Value (LTV) ratios and Debt Service Ratio (DSR)."

He also pointed out that real estate-secured loans disguised as personal business loans for real estate investment appear to have increased in a blind spot of management, emphasizing the need for strict identification and management to prevent such loans from being used as liquidity supply channels for real estate speculation, calling for institutional improvements.

Furthermore, he stated, "If refinancing fails due to unsold properties in real estate-related debt guarantees, liquidity and credit risks can quickly transfer to securities firms and construction companies," adding, "It is necessary to improve the credit screening practice focused on guarantees and strengthen evaluation methods centered on inherent risk factors such as project feasibility."