SoKor's Sudden Property Slump Hits Highly-Indebted Consumers

South Korea's property market has abruptly gone from sizzling hot to floundering, piling pressure on some of the world's most debt-saddled consumers as the sector experiences the fastest interest rate hikes on record, Cynthia Kim reported for Reuters.

Photo Insert: Prices of Seoul apartments last week reported their sharpest decline in 26 months, while transaction volumes in the capital dropped 73% in June from a year earlier.

Prices of Seoul apartments last week reported their sharpest decline in 26 months, while transaction volumes in the capital dropped 73% in June from a year earlier.

The 2.6 quadrillion won ($1.97 trillion) debt tied to the property market faces a major test as borrowing costs rise, with a slump and higher mortgage repayments likely to result in weaker consumption.

South Korea had one of the world's highest household debt-to-GDP ratios at 104.3% in the first quarter, data of 36 major economies from the Institute of International Finance show.

With nearly three quarters of household wealth tied to real estate, policymakers worry higher mortgage rates could increase defaults and take the economy closer to a financial crisis.

Financial regulators expect the number of people that could default on their loans to rise by half a million to 1.9 million once the average mortgage rate reaches 7% from current 5%-6%.

With services and commodities consumption from construction investment accounting for about 15% of economic activity, a property slump, combined with dwindling exports, would pose a big drag on growth.

"South Korea's financial system is one of the most vulnerable in the world to interest rate hikes, as the debt increase over the pandemic has been one of the highest," said Seo Young-soo, an analyst at Kiwoom Securities.

"Those that had recently taken out both a mortgage and credit loans on top of that (for investment) face the most trouble." The Bank of Korea has raised interest rates by 1.75 percentage points since August last year, including an unprecedented 50 basis point hike this month.

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