Bank of Korea: "Supply Shortage is the Biggest Reason for Rising House Prices"

BOK to Release Minutes of July Monetary Policy Meeting

[Image source=Yonhap News]

Opinion Contradicting the Government’s ‘Supply Shortage Theory’

BOK Monetary Policy Committee Leans Toward the Need for Interest Rate Hikes

August COVID-19 Spread is Key... Interest Rate Decision on the 26th

[Asia Economy Reporter Kim Eunbyeol] The Bank of Korea (BOK) stated that a major factor behind the skyrocketing housing prices was a supply shortage. While the government refuted the ‘supply shortage theory,’ arguing that excessive profit-seeking driven by low interest rates pushed up housing prices, the BOK made it clear that resolving the supply shortage issue is essential to curb housing prices.

According to the minutes of the 14th Monetary Policy Committee meeting of 2021 (held on July 15), released by the BOK on the 3rd, in response to a committee member’s question about the unprecedentedly long period of rising housing prices, the relevant department stated, “The biggest influence is supply factors.” It added, “Although the government’s real estate policies focus on increasing supply, there are short-term concerns about supply shortages.” Housing prices have been on an upward trend for the longest period, lasting 7 to 8 years since 2014?2015.

Another committee member agreed with the BOK’s stance on the importance of supply. He emphasized, “Although mortgage loan interest rates have risen over the past year, housing prices have also increased,” and added, “The most effective way to fundamentally stabilize housing prices is through effective supply measures.” Typically, rising loan interest rates suppress housing price increases, but this has not been the case recently. He also analyzed that regulations have had little or only temporary effect in curbing housing price rises.

Regarding the jeonse (long-term lease) market, it was also noted that supply shortages are the core issue. The shortage of jeonse supply has fueled the public’s desire to purchase homes. A committee member pointing out the supply shortage in the jeonse market said, “Housing sales prices are more influenced by supply and demand factors than by interest rates.” The BOK’s assessment contrasts with the government’s position that “supply shortages did not cause the housing price surge.” On June 28, Deputy Prime Minister and Minister of Economy and Finance Hong Namgi, in a public address on real estate, cited excessive expectations, speculative demand, and illegal transactions as causes of the housing price surge, stating, “It is difficult to see supply and demand factors as the sole main cause.”

Although low interest rates are not the main culprit behind rising housing prices, five out of six BOK Monetary Policy Committee members agreed that excessive borrowing could increase risks and that interest rate hikes are necessary. Factors supporting interest rate hikes include inflation remaining in the 2% range for four consecutive months, the possibility of achieving a 4% annual growth rate despite the fourth wave of COVID-19, and ongoing vaccination efforts. However, the potential extension of the Level 4 social distancing measures poses a dilemma for the BOK. The Monetary Policy Committee is expected to carefully monitor the situation until the monetary policy decision meeting on the 26th of this month.