thepeel
Joined: 08 Aug 2004
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 Posted: Mon Nov 26, 2007 11:21 pm Post subject: Korean Housing Bubble Could Cause Economic Bust |
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A well-known columnist for the Bloomberg financial news agency said Korea may be headed for an economic slump because of the housing bubble. If the real estate bubble deflates, the columnist wrote, over-leveraged households would face a credit crisis, consumption would decline, and Korea could fall into a long-term economic descent.
In a column dated May 3, Andy Mukherjee, a Bloomberg columnist covering Asian economies, wrote, "South Korea can't afford to stab the housing bubble." The housing bubble may be deflating as overheated Korean home prices stabilize,� he wrote, but "the danger now is of unintentional overkill."
The enormous interest burden on over-leveraged Korean consumers is the danger lurking behind the real estate bubble, he added. Quoting data from the Samsung Economic Research Institute, he said Korea's household credit-risk index "had a reading of 2.29 in the fourth quarter of 2006, the highest level since the peak of a credit-card bubble in the third quarter of 2002."
"Rising real interest rates have accounted for more than a quarter of the deterioration in the home buyers' credit-risk profile," Mukherjee wrote. "If inflation perks up, possibly because of oil prices, the Bank of Korea may be forced to raise rates again. And that may distress households by simultaneously increasing their mortgage costs and causing the prices of their properties to fall."
Middle-class households that would be unable to withstand the impact of mortgage interests may put their upscale homes up for sale, Mukherjee said. "So is another crisis coming to Korea? It might depend on the central bank."
He suggested "a third way," advising Korea not to hesitate between two choices -- stabilizing commodity prices or housing prices. Korea, he suggested, should follow in the footsteps of the U.S. Federal Reserve Board (FRB).
Traditionally the FRB has made forecasts about real estate and stock markets through its own economic review reports and media outlets, without directly intervening in asset prices. Mukherjee said, "The Bank of Korea brings out a Financial Stability Report twice a year. It isn't something that gets a lot of attention. And that needs to change. Warnings must be timely. The stability report should be turned into a quarterly." |
http://www.freerepublic.com/focus/f-news/1828706/posts |
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