UK Think Tank Warns... "Korean Housing Prices May Not Have Passed the Worst Situation Yet"

"Economic Growth Slowdown, Serious Household Debt"

[Asia Economy Reporter Jeong Hyunjin] The UK think tank Oxford Economics has warned that the housing market bubble in South Korea could burst further. Due to the slowdown in economic growth and high household debt ratios, it is analyzed that South Korea's housing market may not have yet reached its worst point. This is interpreted as a forecast that house prices could continue to decline.

In a report on the 13th, Oxford Economics stated, "Due to the slowdown in economic growth and high leverage (household debt), 'The worst may not be over yet for the South Korean market,'" while also predicting that "pressure from interest rate hikes is expected to ease."

[Image source=Yonhap News]

Oxford Economics noted, "House prices in the Asia-Pacific region were stable or rising last year and, although at a slower pace, are expected to continue rising steadily over the coming years," citing Australia, South Korea, and China as exceptions to this trend. In particular, it pointed out that the housing markets in South Korea and Taiwan appear vulnerable.

According to the report, most Asia-Pacific countries have household debt ratios below 80% of GDP, but South Korea, Hong Kong, and Thailand were exceptions. South Korea's mortgage debt ratio relative to GDP exceeded 100% in 2021. This ratio, which was in the 60% range in 2007, has significantly expanded and is higher compared to other Asia-Pacific countries such as Thailand and Malaysia.

South Korea's household debt reached 102% of GDP as of June last year, according to the global credit rating agency Standard & Poor's (S&P). At that time, S&P classified South Korea, along with Australia (117%) and Canada (106%), as countries at risk due to household debt.

In this context, the Bank of Korea, the central bank, has taken a hawkish stance by raising the base interest rate by a total of 300 basis points (1bp = 0.01 percentage points) from the second quarter of 2021 to February this year. Oxford Economics pointed out that South Korea's household debt is under pressure from rising interest rates and analyzed that "as a result, the decline in house prices is 'modest' but undergoing a correction period."

The problem is that economic growth is sluggish, making income increases difficult. As of 2021, the ratio of mortgage debt to income in South Korea was 68%, higher than the US (63%), Thailand (51%), and Hong Kong (60%). Countries with higher ratios than South Korea included Australia (180%), New Zealand (105%), and Malaysia (76%). South Korea's mortgage debt relative to income increased by 5.3 percentage points compared to 2017. During the same period, the US and Australia saw decreases of 4.1 and 1.6 percentage points respectively, while Thailand and New Zealand experienced increases of 3.8 and 1.8 percentage points.

With the burden of household loan repayments increasing due to interest rate hikes, if income growth lags behind loan growth, there is a high possibility of household debt defaults. If household debt problems spread to financial institutions, there is also a risk of contagion to the real economy.

Australia and New Zealand were identified as having the most severe housing bubbles in the Asia-Pacific region. Oxford Economics reported that the housing markets in these and some other advanced Asian countries are struggling, noting that house prices in New Zealand have adjusted downward by more than 10%. Unlike other emerging Asia-Pacific countries showing rising house prices, China’s house prices have also fallen by 3.3% from their peak.

However, amid growing global recession concerns in the US and elsewhere, Oxford Economics forecasts that the overall Asia-Pacific housing market will survive without severe corrections despite low growth and high interest rates.

Earlier, the International Monetary Fund (IMF) predicted in December last year that "South Korea's house prices in the fourth quarter of 2022 could fall by about 10 percentage points compared to the fourth quarter of 2019, before the COVID-19 outbreak." Since this analysis was based on the fourth quarter of 2021, before the full-scale interest rate hikes, it was anticipated that the risk of house price declines would increase when factoring in last year's rate hikes.