Banks’ apartment loans surge, spiking concern

The nation’s seven major banks saw their housing-collateralized loans rapidly increase over the past two months amid the revitalized property market.

Following the monthly growth of 6.8 trillion won ($6.1 billion) in housing-collateralized loans ― or loans for purchasing apartments ― in April following the March 12 key interest rate cut, commercial banks also reported a collective increase of more than 6 trillion won in May, their lending data showed Wednesday.

The surge of more than 6 trillion won for two consecutive months has been posted for the first time in five years since 2010, leading more and more economists to raise concerns that the ballooning household debt could have disastrous economic effects in about a year.

LG Economic Research Institute said in its report that an increasing number of relatively low-income households are using the bank loans, collateralized by their houses, for living expenses or microbusiness funds.

Korea University professor Kim Dong-won was quoted by a news outlet as saying that “the loan insolvency could start around the third quarter of next year when the grace period ― in which borrowers only pay interest ― expires.” After the unredeemable period, they have to pay both principal and interest every month.

Kim warned that the household debt problem involving possibly huge delinquency could turn out to be more critical than the 2003 credit card woes.

Insiders in the real estate industry point out the seasonally sluggish loans every May. The housing-collateralized loan growth stayed at 1.7 trillion won in May 2014, 1.9 trillion won in May 2013, 1.8 trillion won in May 2012, 1 trillion won in 2011 and 797 billion won in May 2010.

Policymakers have sought to boost the economy by activating the construction and real estate sector. The Bank of Korea played a part by lowering the benchmark rate by 25 basis points to 1.75 percent in March.

If the central bank chooses to cut the rate once more to 1.5 percent in the next rate-setting meeting, slated for June 11, the household loan growth could pick up pace. At the same time, it is the export-oriented enterprises that are pinning desperate hopes on a rate cut as it will be linked to depreciation of the Korean currency.

As a result, the BOK and economic policymakers have the difficult task of balancing the contrarian effects on household debt and exports while taking steps to invigorate the economy.

By Kim Yon-se (kys@heraldcorp.com)