Aging population poses risks in property market

The aging population could trigger new financial risks in the property market as an increasing number of retirees are expected to sell homes to repay debt, the Bank of Korea said Tuesday.

The senior householders’ sell move could trigger oversupply of properties, pulling down property prices, eventually adding to household debt and decreasing the gross domestic product and economic growth rate.

“The senior householders can pose new risks in the property market in their moves to deleverage their household debt (by selling homes), although this will not happen immediately in the next one or two years,” said Cho Jeong-hwan, director general of BOK’s financial stability department, in a press briefing on the financial stability report.

In the 2010-2014 period, senior householders cleared the highest amount of household debt, mostly by selling homes, according to the BOK’s report.

The financial debt level of senior householders aged 60 and up turned out to be the highest, with the average debt to disposable income ratio surpassing 200 percent.

BOK officials expected that, by the 2020-2024 period, the baby-boom generation, aged 52-60, will increasingly depend on selling real assets to repay debt, eventually imposing a heavier burden on the property market. Stabilizing the property market, along with household debt control, will have an increasing influence over the country’s financial soundness, they said.

The report said seniors aged 55 to 74 hold financial debt that accounts for as high as 85-115 percent to their total financial assets. This is largely because nonfinancial assets -- with lower liquidity compared to financial assets -- constitute an average of 80 percent of their total assets.

Cho said the senior population needs to increase the portion of disposable financial assets, such as pension plans, in their portfolio to avoid property market risks in the aging society.

Meanwhile, the report also raised concerns about the country’s quickly growing level of household debt. 

As of the end of September, the country’s household debt stood at 1.166 quadrillion won ($993.1 billion), up 10.4 percent from a year ago. The household debt to disposable income ratio also rose to 143 percent, up 5 percentage points in six months. 

On the corporate level, however, BOK voiced concerns, citing the country lacks legislative support for clearing financially unsound companies. The corporate restructuring bill is still pending in the National Assembly, despite pleas from financial authorities, including BOK Gov. Lee Ju-yeol and previous Finance Minister Choi Kyung-hwan.

The BOK’s parliamentary report came a week after it marked down the country’s potential growth rate to 3.0-3.2 percent.

By Chung Joo-won (joowonc@heraldcorp.com)