Korean property market to be supported by the government

Kwon Dae-young, standing commissioner at the Financial Services Commission, speaks at a meeting held in central Seoul on Monday. [FSC]

Korean financial regulators will provide more support for the property market in order to increase the odds of a soft landing.

The Financial Services Commission (FSC) said on Monday it will commit 5 trillion won ($3.9 billion) to real estate through financial institutions, including the Korea Development Bank and the Industrial Bank of Korea.

Loans and guarantees from financial institutions last year to the property market totaled 23.4 trillion won.

The additional funds will be spent on support measures, including an extension of existing loans and the purchase of property developer corporate loans.

“The current project financing market cannot yet be seen as a systematic risk compared to the past crisis” in 2009, said Kwon Dae-young, standing commissioner at the FSC, on Monday. “With the guarantee by policy institutions, a channel that enables conversion to long-term loan becomes possible."

Kwon and senior officials from other institutions, including the Bank of Korea and the Financial Supervisory Service, attended a meeting to discuss project financing and the short-term financial markets.

“The real estate project financing market cannot yet be seen as a risk to the entire system, but is seen as being locally going through risks and difficulties,” the FSC said in a statement.

Anxiety in the real estate market is lessening as a result of deregulation and increased liquidity, but the financial authorities agreed preemptive measures are needed as insolvency in real estate project financing has a large ripple effect across the economy and finance, the FSC added.

It will encourage financial institutions to expand the allowance for bad debts and their total loss-absorbency capacity. The FSC will also come up with tools aimed at preventing moral hazard in project financing.

Korea’s real estate development projects were hit hard by a sudden and a rapid cooling of demand for homes amid hawkish monetary policy and an economic slowdown. The default of a company related to the Legoland Korea Resort developer last year also contributed to cooling of the property market.

The corporate bond and short-term financial markets have recovered since the second half of last year, the FSC said.

The spread between three-year government bonds and corporate bonds with the same maturity was 67 basis points on March 2nd compared to 99 basis points on Jan. 31 and 177 basis points on Nov. 30. The net issuance of corporate bonds grew to 4.3 trillion won in February from 4.0 trillion won in January.

BY JIN MIN-JI [jin.minji@joongang.co.kr]