Real estate financial risk exposure in South Korea has reached alarming levels, surging to 2,881.9 trillion won (approximately $2.12 trillion) as of the end of June 2024. This figure marks a 44.3 trillion won increase from the end of the previous year and represents 115.9% of the nation’s nominal GDP. The term “real estate financial risk exposure” encompasses all funds invested in real estate-related financial products, including household and corporate loans, real estate funds, and real estate investment trusts (REITs).
Rising Trends
The data, submitted by the Bank of Korea to Rep. Cha Kyu-geun of the Cho Kuk Innovation Party, reveals a consistent growth trend in real estate financial risk exposure over recent years. Since 2015, this exposure has effectively doubled. Initially recorded at 1,443.5 trillion won by the end of 2015, the growth rate has slowed to single digits in recent years, yet exposure has not declined. By the end of 2019, it surpassed 2,047.5 trillion won, crossed the 2,500 trillion won threshold in 2021, and is now nearing 2,900 trillion won.
Household Loans on the Rise
Significantly, the share of household loans in the overall real estate financial risk exposure has begun to climb again. At the end of the first half of 2024, household loans accounted for 1,424.7 trillion won, representing nearly 49.4% of total exposure. This figure had peaked at 55.3% in 2015, then fell to 48.2% in 2022 before rebounding to 49% last year, with further increases noted this year. The percentage of real estate-secured loans within household loans, which had declined from 71.4% in 2015 to 50.6% in the first quarter of this year, slightly rose to 50.7% by the end of the second quarter.
Corporate Loans and Financial Investment Products
Conversely, corporate loans, which had been on the rise, decreased from 39.9% of total exposure in 2022 to 37.7% by the end of the first half of 2024, amounting to 1,085.6 trillion won. Financial investment products accounted for 12.9% of total exposure, equivalent to 371.7 trillion won.
Systemic Risk Concerns
There are growing concerns regarding the potential for systemic risks stemming from the influx of funds into real estate. A sharp decline in real estate prices or financial instability among institutions managing these funds could have far-reaching spillover effects between financial and real sectors. Rep. Cha highlighted the implications of recent interest rate cuts, indicating that there is an increased risk of surging real estate financial exposure, especially concerning household loans. He emphasized the urgent need for stringent risk management, particularly given rising household debt and ongoing project financing (PF) challenges.
Conclusion
As real estate financial risk exposure continues to rise in South Korea, the balance between growth and risk management becomes increasingly critical. Policymakers and financial institutions must navigate this landscape carefully to prevent potential economic instability and protect stakeholders involved in the real estate sector.
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