"This Year’s Housing Price Decline Continues... Could Spread Due to Financial Instability"

Bank of Korea, Monetary and Credit Policy Report
Concerns Over Increased Credit Risk in Non-Bank Financial Institutions

[Image source=Yonhap News]

As the real estate downturn continues, forecasts suggest that housing prices will keep declining this year. Considering the elevated interest rates, expectations of falling housing prices, and the housing market cycle, further declines are deemed inevitable. In particular, the volume of gap investment (purchasing with jeonse deposits) accumulated during the boom period is expected to accelerate the decline in housing prices if landlords decide to sell.

On the 9th, the Bank of Korea stated in its Monetary and Credit Policy Report, "Given the high persistence of housing price expectations, the expectation of further declines may continue for a considerable period, acting as a downward factor on housing prices."

According to the report, the recent simultaneous decline in sales and jeonse prices could deepen the slowdown in the housing market and deleveraging (debt reduction). Typically, the sales market and the jeonse market tend to show opposite price trends, but recently, due to reduced jeonse demand caused by interest burdens, both sales and jeonse prices have fallen together, and the jeonse price ratio continues its downward trend.

Moreover, the volume of gap investment housing accumulated during the boom period could increase downward pressure on housing prices if landlords sell, and if sales prices fall below the existing lease deposit amounts, tenants' risks may also expand.

The Bank of Korea warned that the significantly expanded real estate-related exposure of financial institutions could become a source of financial system instability if the real estate market downturn intensifies.

In particular, as the pre-sale market slows, concerns are growing about the financial conditions of construction companies, especially small and medium-sized enterprises, and the soundness of some non-bank financial institutions with high real estate financial risks.

The Bank of Korea stated, "In the early stages of projects, high interest burdens, rising construction costs, and financial institutions' reluctance to handle project financing (PF) loans are likely to cause delays and suspensions in some projects," adding, "Unsold inventory is expected to gradually increase even in projects not yet completed." Accordingly, it forecasted that the fixed non-performing loan ratio of small and medium construction companies and the expected default probability embedded in the stock prices of listed comprehensive construction companies will rise, expanding the financial risks of construction firms.

By sector, for banks, continued housing price declines are expected to increase related loan delinquency rates and worsen profitability due to deleveraging pressures. Non-bank financial institutions have high-risk exposures related to real estate PF and a high proportion of loans to projects other than apartments. Their reliance on market-based borrowing and interconnectedness among financial institutions are high, raising concerns that if high-risk PF project defaults materialize, credit risks could spread.

The Bank of Korea emphasized, "To prevent the spread of credit concerns and ensuing financial instability related to non-bank financial institutions with large real estate financial exposures, it is crucial to identify and resolve vulnerable sectors early to reduce counterparty risks," adding, "Especially, delays in restructuring real estate PF financing could increase related costs."

Hong Kyung-sik, Director of the Monetary Policy Department at the Bank of Korea, said, "Regarding real estate PF restructuring, there are opposing views between those advocating for proactive restructuring and those suggesting monitoring in relatively better situations considering economic shocks," and added, "Given the accumulated experience from past savings bank failures, financial authorities are actively responding to related issues."