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BOK flags house debt rise

Also points to dangers that rising home prices pose to nation’s financial market

Nov 20,2009
Korea’s central bank identified higher household debts and rising home prices as major potential dangers for the nation’s financial market.

The Bank of Korea said in the “Financial Stability Report” released yesterday that household debts compared to disposable income continued to increase in Korea this year over last year, whereas those in the United States and the United Kingdom declined due to deleveraging of mortgages in the aftermath of the global financial crisis.

In addition, Korea’s household debts are likely to continue to increase, led by mortgages, because local banks are more active in providing loans to households than to companies amid business uncertainty and because consumers still expect home prices to rise further, the BOK said.

The central bank warned in the English-language report, “Households whose scale of borrowings is excessive may well suffer a deterioration of their cash flow because their burden of interest payment is likely to increase as market interest rates come under upward pressure in addition to the large-scale rise in interest premiums on household loans.”

Interest premiums refer to the gaps between banks’ loan rates and the market interest rates which banks take as a benchmark for their loan rates.

“Nevertheless, a likelihood of households being unable to service their debt on a large scale is considered to be low,” the BOK added.

The central bank pointed out that the average loan-to-value ratio for mortgages in Korea was 47.1 percent as of the end of July, much lower than 74.9 percent of the U.S. and 85.2 percent of the U.K.

Still, upward pressure on home prices is a concern, the BOK said, though the tightened regulations on mortgages have slowed down home price hikes recently.

“In view of the ample market [short-term] liquidity, and expectations among the general public of a rising trend in housing prices, the upward pressures on housing prices are seen to continue as before,” the central bank said in the report.

Meanwhile, local companies have been in a better position to repay debts, the central bank said, as their profitability showed signs of recovery in the first half of the year and their liquidity supply “remained stable.”

Still, small and medium-sized companies’ conditions might deteriorate later this year, the BOK warned.

The bank pointed out that smaller companies with relatively low profitability levels were constrained in raising long-term funds from banks but were able to expand short-term borrowing in line with the implementation of the government’s support programs.

“Such firms may find themselves in increased difficulties in refinancing these funds or extending their maturities as the SME financing program is expected to be terminated at the end of 2009,” the BOK said.


By Moon So-young [symoon@joongang.co.kr]







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