11/16(목)- Rising home prices may drag down bourse

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11/16(목)- Rising home prices may drag down bourse

Mortgage loans resurge despite repeated warnings; floating funds could distort market

Resurging housing prices may prompt investors to reallocate a significant portion of their capital to the property market, away from the stock market, analysts said yesterday.

Commercial lenders, which had refrained from extending mortgage loans under pressure from the Financial Supervisory Service, the official regulator, have begun to increase lending in recent weeks. With the housing market-related liquidity growing, home prices have continued to rise in recent weeks, industry watchers note.

Whether the reviving property market will affect the capital flow will be closely watched by analysts and monetary policymakers.

"We expect a 'property market factor' to be critical in the supply and demand of the stock market," said Kang Sung-mo, chief strategist at Korea Investment & Securities Co. Although there is no statistical evidence available, past records support a direct capital movement between the property and the equity market, he said.

The policy measures to curb property speculation unveiled in August last year and March this year, for example, boosted the local bourse that had undergone a correction at that time, he added.

Retail and local institutional players have extended their investment while foreign investors who once were dominant, have began to shun Korean stocks. Savings funds, in particular, were a major source of capital that cushioned the selling spree of foreign investors until recently.

"But now, rising housing prices will likely to induce many retail investors to buy property," the strategist said. The daily average stock-type savings funds flowing into the local bourse is estimated to be at a record low of between 10 billion and 20 billion won.

A series of the regulator's warnings do not seem to deter commercial lenders from extending mortgage loans to households seeking to buy property.

Kim Seong-hwa, director of the bank supervision department at the FSS yesterday warned financial institutions of a potential credit risk stemming from a business downturn and a sharp fall in housing prices. "We intend to bolster our monitoring of the pace of household debt growth and the financial health of institutions," he said.

Mortgage loans surged in October as an increasing number of households heavily borrowed from financial institutions on anticipation of surging housing prices in the coming months, industry sources say. In October, the combined fresh loans of the nation's four prime lenders - Kookmin, Shinhan, Woori and Hana Bank - reached almost 1.9 trillion won, according to industry estimates.

The new credit demand began to pick up in September after staying sluggish for about three months. At the end of October, mortgage loans extended by the banks totaled 139.1 trillion won.

Banks' aggressive marketing strategies and downward trends in mortgage loan interest rates should sustain the growth momentum in new mortgage loan demand throughout the year, according to banking officials.

The North Korea issue has turned out to be a mere political event - so far - and a sharp pick up in housing prices will take on greater importance in future monetary policymaking, analysts said.

With rising domestic liquidity, many industry experts have warned that massive floating funds could distort capital markets. While the stock market has undergone a correction phase, investors remained reluctant to make a long-term investment decision and have invested in money market funds and other short-term financial products. Excessive floating funds are not desirable because it makes it difficult to channel sufficient long-term capital into the corporate sector via the stock market.

Historically low interest rates have induced many Koreans to heavily borrow money to purchase apartments. "As long as rates remain low, liquidity should continue to expand, driving up housing prices," said D.S. Shin, economist at Samsung Securities Co.

Domestic bank's average interest rate on household loans stands at 6 percent, half of what it was 10 years ago, he notes.

A shift by the government to an expansionary stance in an effort to prevent economic slowdown because of the North Korea issue is also likely to boost housing prices, he added.

(jungmin@heraldm.com)

By Kim Jung-min

2006.11.02

• How much is your rent?
• Is it better to rent or buy? Give reasons for your answer.
• Which one is better way to make big money between investing to apartment or saving money in bank? 
• Do you think it is good that government control home price?
• Why does government fail to keep down home price?