Property slump warnings for South Korea makes Far East wobbly

South Korea may experience a property bubble burst like the United States if sluggish home sales continue amid an economic downturn, pushing more builders to the brink of bankruptcy and eroding debt repayment capabilities of mortgage borrowers, according to an economic institute.

The Hyundai Research Institute (HRI) is warning of a 'hard landing' for the mortgage market, saying the ongoing housing slump will raise downward pressure on home prices.

'A fall in the value of property will cause a rise in debt default rates. This will negatively affect construction firms and lending institutions,' its latest report said. 'The worst-case scenario is that Korea may enter the spiral of a housing slump like the United States now and Japan in the 1990s.'

Foreign property owners have increased in the country since the government allowed foreign investors to buy in 1999 and high income yields of around 8% for villas and apartments attracted strong interest.

What is happening in South Korea, however, is being taken as a benchmark for the rest of this sector in the Far East as property remains unsold.

'The rise in unsold apartments, the uncertain outlook for economic growth and rising household debts point to a slowdown in the housing market. More construction firms are likely to suffer financial difficulty,' said Park Deok-bae, an HRI economist.

In 30 years as a real estate broker, Chung Doo Hyun says he has never seen a market behave the way the one in South Korea is behaving today.

First, there was the wave of feverish buying that drove housing prices up across the country, including in skyscraper-studded Seoul financial district, Yoido. Then, about a year ago, buyers and sellers became scarce, he says. Now the entire market is coming to a near halt, as if someone had hit the pause button on a remote control.