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| The government seeks to cool down apartment prices, which the Asian Development Bank said will weigh down Korea's growth potential in 2018 and 2019. / Yonhap |
ADB lowers Korea's 2018 outlook to 2.9%
By Park Hyong-ki
A global development bank has issued a fresh warning over Korea's overheated property market ignited by loose credit policies in recent years.
The Asian Development Bank (ADB) said in its recent outlook report that Asia's fourth-largest economy will slow down further this year and in 2019 not only because of the U.S.-China trade conflict, but also due to its housing sector facing a high degree of vulnerability.
These internal and external factors have warranted the ADB to lower Korea's growth projection to 2.9 percent from 3 percent this year, and to 2.8 percent from 2.9 percent for 2019.
"Korea will be lower in both years as exports suffer under higher tariffs imposed by two of its largest trade partners," the ADB said in the report.
"Elevated housing prices threaten severe growth downturns if prices reverse abruptly. Housing prices that have undergone sharp and sudden reversals, empirical studies showed, tended to be associated with longer and deeper slowdowns."
The development bank attributes the property risk with the country having the "least home affordability on price spikes" to prolonged accommodative monetary policies.
Following the Sept. 13 real estate measures, the finance ministry and financial regulators indicated they will introduce a stricter and tougher set of metrics assessing bank lending to households and multiple homeowners in mid-October.
They are expected to enforce a system with revised ratios measuring their personal credit risks such as loan-to-value (LTV), debt-to-income (DTI) and debt service ratio (DSR).
The government is likely to introduce "stronger standards" for LTV, DTI and DSR that would further limit banks and nonbanks from extending household loans, and at the same time, "squeeze" banks to boost their risk management under the capital adequacy rules.
Along with the possibility of enforcing rules to drastically lower personal loan risks, the regulators are expected to apply a stricter loan-deposit ratio (LDR) that assesses banks' liquidity.
All these, that seek to restrict borrowings especially to those who already own a house, will make lenders reconfigure their capital adequacy to meet regulatory standards by boosting their buffers as their risk exposure increases under the readjustment of the metrics.
And the regulators are highly likely to speed up the enforcement ahead of their initial plan to bring stability to the real estate market and households, analysts say.
The regulator is looking to apply the LTV ratio of zero percent for those who already have an apartment. This means they cannot borrow at all.
DSR comprehensively examines individuals' loan history and portfolio including their credit card debt, mortgages and repayment capability before extending credit. DTI evaluates individuals' capabilities in repaying principal and interest on mortgages they requested and interest on other existing loans.
The loan-to-deposit ratio, measuring a bank's total outstanding loans to its total deposit over a certain period of time, will likely to be set below 100 percent. A lower LDR would mean lenders will have to have more cash on hand for contingencies.
"When household debt increases in line with economic growth and development of the financial market, it can promote growth," said Jean Lim, research fellow at the Korea Institute of Finance.
"However, if it grows too fast, it might dampen economic growth and hurt financial market stability. Excessive household debts increase repayment burden, limit private-sector consumption growth and might magnify downward pressure in case of a negative economic shock, thereby delaying a recovery."
