A mild drop in property prices still carries financial risks in South Korea
Even without a steep drop in prices, the downturn in South Korea’s property sector is a source of worry given the rise in property-related debt in recent years. Though pressures from rate hikes should ease, interest rates are high and the growth outlook remains weak.
Our baseline assumes a 7% peak-to-trough fall in South Korea’s house prices in the current downcycle, a milder correction than what we expect in Australia and New Zealand. The historical trend of house price-to-income ratio implies that housing is moderately overvalued.
What you will learn:
- Our previous analysis showed that a resilient labour market could restrain the severity of the housing market downturn.
- Still, high leverage could amplify the risks coming from a mild drop in property prices. Property-related loans for both households and corporates have increased sharply.
- South Korea’s Jeonse (leasehold deposit) system also poses unique macro financial risks.
- In an environment of high interest rates, South Korea’s property sector adds downside risks to our already gloomy growth forecast. Moreover, recent banking turmoil in the US and Europe could lead to sharper-than-expected falls in asset prices.
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