By Na Jeong-ju
Staff Reporter
South Korea may experience a property bubble burst like the United States if sluggish home sales continue amid an economic downturn, pushing more builders to the brink of bankruptcy and eroding debt repayment capabilities of mortgage borrowers, according to an economic institute Sunday.
In a report, the Hyundai Research Institute (HRI) warned of a ``hard landing'' for the mortgage market, saying the ongoing housing slump will raise downward pressure on home prices.
``A fall in the value of property will cause a rise in debt default rates. This will negatively affect construction firms and lending institutions,'' the institute said. ``The worst-case scenario is that Korea may enter the spiral of a housing slump like the United States now and Japan in the1990s.''
The institute said mortgage-backed loans account for 47 percent of total loans at major Korean banks and 79 percent at savings banks. Just before a housing bubble burst in the early 1990s, Japanese banks had only 26 percent of mortgages, while non-banking institutions had 40 percent.
``The rise in unsold apartments, the uncertain outlook for economic growth and rising household debts point to a slowdown in the housing market. More construction firms are likely to suffer financial difficulty,'' said Park Deok-bae, an HRI economist.
Many economists raised concerns that the United States is sliding into a recession as data indicate its housing market is in a deep slump with the contagion spreading over to consumption.
According to the Associated Press, a recent survey of 259 economists affiliated with the U.S. National Association for Business Economics shows 34 percent pointing to the subprime mortgage turmoil as ``the No.1 threat to the economy over the next two years.''
The Samsung Economic Research Institute recently said the credit default risks for South Korean people may reach a ``critical point,'' causing a financial crisis that is of the same scale as the credit card bubble burst in 2002.
The institute said that if household debt increases at the same pace as last year, credit risks may reach a point where hundreds of thousands of people will be unable to cover their debts with their income.
``If interest rates rise suddenly, or housing prices drop sharply, many households will be exposed to greater default risks. The credit bubble bust in 2002 can occur at any time,'' the HRI said.
The Korea Institute of Finance said lenders should look closely into a borrowers' debt repayment capability when they extend housing loans.
``As mortgage lending accounts for a significant portion of banks' interest income, banks are raising competition to attract more housing loan borrowers,'' the KIF said in a report. ``The heated competition may erode banks' profitability as the housing market remains sluggish due to the previous government's measures to bring it under control.''