80% of household assets are concentrated in real estate, and the PF exposure amount dependent on debt also exceeds 200 trillion won [금융팀의 뱅크워치]

It does not seem like the chronic problem of the Korean economy, which has been so-called ‘all-in’ on real estate, will end in the short term. Not only is about 80% of household assets concentrated in real estate, but real estate project financing (PF) loans also exceed 200 trillion won.

●Real estate accounts for nearly 80% of household assets

According to the ‘2023 Household Financial Welfare Survey’ released by Statistics Korea and the Bank of Korea in May, the average total assets per household were 527.27 million won, down 3.7% from the previous year. This was due to the fact that financial assets increased by 3.8% compared to a year ago, but real assets decreased by 5.9%. This is the first time in 11 years since the statistics began to be compiled in 2012 that household assets have decreased.

The problem is that real estate accounts for 414.24 million won, or 78.6% of household assets. Compared to major advanced countries, Korea’s dependence on real estate is excessively high. As of 2021, the share of real estate in household assets in the United States was 28.5%, and in Japan (37.0%) and the United Kingdom (46.2%), it is significantly lower than in Korea.

Experts are concerned that household wealth concentrated in real estate has a negative impact on the overall economy. At the household level, households invest all their spare money in apartments, which makes them less prepared for retirement. In addition, this concentration of households in real estate indirectly affects corporate productivity by increasing land prices.

Ha Jun-kyung, a professor of economics at Hanyang University, pointed out that “when land prices rise, money that should be used for research and development (R&D) flows into rent, which increases companies’ production costs and lowers capital productivity,” adding that “if companies’ productivity falls, it is inevitable that national competitiveness will also decline.”

A senior official from the financial authorities said, “At the household level, the belief in the so-called ‘myth of real estate invincibility’ is strong, and the perspective of viewing apartments as an investment target is also valid,” and asked, “Can housing mortgage loans (housing collateral loans) naturally decrease in a situation where such unconsciousness is at the root?”

A view of ‘Raemian One Bailey’ located in Seocho-gu, Seoul. The so-called ‘national standard’ (exclusive 84m²) of this apartment was sold for 6 billion won on the 2nd of this month, breaking the record price. Converted to price per pyeong (m²), it amounts to 200 million won. News 1

● Financial sector also increases PF loans beyond households

While households are receiving housing loans and deepening asset concentration, financial institutions have been aggressively investing in real estate-related loans. In particular, the size of ‘PF loans’, which raise funds by emphasizing expected future profits and develop real estate businesses, has increased. According to the Financial Supervisory Service, as of the end of June this year, the financial sector’s PF exposure amounted to 216.5 trillion won. Considering that the balance of corporate loans in the banking sector was 1,311.9 trillion won as of the end of last month (source: Bank of Korea), this means that the proportion of PF in total corporate loans exceeds 15%.

At one time, PF loans were considered a lucrative investment for financial institutions, providing huge returns. However, the situation changed with the interest rate hike starting in March 2022. As the cost of land purchases and project costs increased, businesses that were delayed in development began to appear one after another, becoming a detonator in the financial market.

Reporter Kang Woo-seok

Regarding PF loans, the Korea Development Institute (KDI) published a report titled “Galapagos-style real estate PF, fundamental structural improvement needed” in June of this year, pointing out that the PF business method is fundamentally problematic. In the report, KDI stated that “(the main body of the PF business) the project developer has generally invested only 3% of the total project cost as capital, and has been pushing forward the PF business by borrowing the remaining 97%,” and explained that “the fundamental cause of the real estate PF problem lies in the outdated financial structure represented by ‘low equity capital’ and ‘high dependence on guarantees. ’”

In a country with such an economic structure, where households, businesses, and financial institutions are all focused on real estate, can growth and innovation be active? It doesn’t seem easy for the time being.

Reporter Kang Woo-seok [email protected]

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2024-09-17 16:56:30