Mortgage growth hits 5-year high

The monthly increase of outstanding mortgages rose to its fastest pace in five years last month amid record-low interest rates, after the Bank of Korea cut its key rate to 1.75 percent on June 11.

Korea’s seven largest commercial banks’ collective housing-collateralized loans swelled by 9.27 trillion won ($8.27 billion) in June, compared to the previous month. The figure included loans that borrowers converted into state-led, lower-rate contracts.

The May-June 2015 period saw the highest monthly growth rate since the first-tier lenders started officially publicizing the relevant statistics in 2010.

They saw average monthly growth of housing mortgages of below 4 trillion won over the past few years. For the May-June figure, the growth was 2.59 trillion won in 2014, 2.02 trillion won in 2013 and 1.28 trillion won in 2012.

Their total outstanding mortgage balance surged 38.1 percent in five years since June 2010 to 321 trillion won in June 2015.

When converted loans on lower lending rates are included, the collective outstanding balance is estimated to have increased by about 120 trillion won, more than 50 percent, during the five years.

The BOK’s two rate cuts in the first half of the year is fanning the housing loan expansion. Monetary policymakers eased the yearly benchmark rate from 2.25 percent to 2.0 percent in March, and to 1.75 percent in June amid mounting concerns over GDP growth lowered by sagging exports and private consumption.

The average rate on housing-backed loans offered by KB Kookmin Bank, which topped the list of outstanding home loans, dropped to an all-time low of 2.98 percent last month.

Data from the Seoul Real Estate Info Provider showed that the number of apartment transactions came to 11,115, up more than 100 percent from 5,164 in transactions a year earlier.

A report from the Korea Institute of Finance had warned of risks from the rate cuts. It said many households, which were recklessly issued bank loans on low rates, could be saddled with a heavier burden of redemption when Korea raises rates again. If the U.S. Federal Reserve adopts a tighter monetary policy, as is expected later this year or in early 2016, the BOK could be compelled to follow suit, said analysts.

A research fellow from LG Economic Research Institute downplayed the positive effects of the rate cuts. He predicted that the effects would be restricted in terms of reinforcing the economy, citing the “structurally weak” consumer sentiment caused by the record household debt.

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