[BOK Focus] "Real Estate Invincibility Is a Thing of the Past" Remark Removed by Bank of Korea Governor After 5 Months

The Bank of Korea Governor Who Urged Rethinking 'Real Estate Invincibility'
Avoids Forecasts as Loans Increase and Market Shows Signs of Recovery Despite High Interest Rates

"There is a prevailing view that investing in real estate guarantees success because it never fails, so many people consider it a form of financial investment. However, we need to reconsider the assumption that past trends will continue into the future." (March 7, 2023, Korea Broadcasting Journalists Club invited discussion)

"If you bought a house thinking that interest rates will return to low levels, you need to be very cautious." (August 24, 2023, Monetary Policy Direction Press Conference)

The warning from Lee Chang-yong, Governor of the Bank of Korea, directed at the 'Yeongkkeul' generation?those who borrowed heavily to buy homes?has subtly changed within just a few months. At the Monetary Policy Direction press conference on the 24th, Governor Lee did not forget to caution against Yeongkkeul. However, compared to the first quarter when he issued warnings with the nuance that the 'real estate invincibility myth is unlikely to continue,' his tone has generally softened. This is seen as revealing the governor’s inner thoughts, feeling the limits of monetary policy alone as the real estate market has recently stirred again and the theory of a housing price bottom has widely spread.

In March, Governor Lee labeled the real estate invincibility myth as a 'past trend' and sent a message to young people who made reckless investments that "real estate is an outdated financial investment method." At that time, housing prices were falling rapidly to the extent that the government was worried about a hard landing and introduced deregulation policies.

At this month's press conference, when asked about real estate, Governor Lee reiterated the risks of Yeongkkeul but the reasons he cited were quite different from five months ago. He said, "The younger generation today has not experienced inflation, so if you bought a house thinking interest rates would return to low levels, you need to be very cautious," adding, "If you borrowed money to buy, the financial costs are unlikely to be as low as in the past decade, so you should consider this when investing in real estate." The caution against the invincibility of real estate was completely omitted.

Moreover, Governor Lee avoided commenting on housing price forecasts altogether. When asked about the theory of a housing price bottom, he said, "Prices can vary greatly depending on the location," and added, "I do not want to talk about what will happen." The confident response in January this year, when he answered questions about the government's deregulation policy with "There are concerns, but real estate is in a significant downward phase," has disappeared.

Behind this is the current sign of recovery in the real estate market shown by various statistics. According to data from the Korea Real Estate Board, the apartment sales price index, which was negative until June this year (-0.04%), turned positive in July (0.06%). According to the Real Estate Board, nationwide apartment prices have been rising for six consecutive weeks, and the rate of change, which had been rising mainly in the metropolitan area, has turned positive nationwide. Real estate prices, which in April only showed a slowdown in the decline, are now rising.

Expectations of price increases are also returning. The Housing Price Outlook Index began rising in December last year and reached its highest level in one year and three months in August this year. The index exceeding 100 means that the belief in rising house prices outweighs that of falling prices; it recorded 102 in July and 107 in August.

The recent 'Household Excess Savings Report' released by the Bank of Korea unintentionally strengthened the belief in rising house prices. The report mentioned the problems that could arise when the excess savings of over 100 trillion won accumulated during the pandemic flow into the real estate market. The Bank of Korea emphasized, "As expectations for housing price increases rise, if excess savings, together with loans, provide opportunities to re-enter the housing market, leading to housing price increases and delayed household deleveraging, it will be a negative factor for financial stability." The public disclosure of the Bank of Korea’s concerns through the report rather fueled market expectations.

As a result, despite rising loan interest rates, mortgage loans are rapidly increasing. According to the Bank of Korea on the 22nd, as of the end of the second quarter this year, mortgage loans (balance of 1,031.2 trillion won) increased by 14.1 trillion won compared to the end of the first quarter, setting a record high balance. This is the largest increase since the third quarter of 2021. The surge in mortgage loans has also raised household debt itself. The household loan balance at the end of the second quarter was 1,748.9 trillion won, up 10.1 trillion won (0.6%), returning to an increasing trend after four quarters. The willingness to take out loans despite high interest rates stems from the belief that "house prices will rise in the future."

For the Bank of Korea, which saw a soft landing of the real estate market as the biggest task earlier this year, discussing house prices at this point is inevitably burdensome. Governor Lee expressed the opinion that "monetary policy does not target real estate prices themselves" and that micro-level responses should come first. This means that monetary policy as a tool is limited in breaking the real estate invincibility mentality that raises overall household credit.

As the theory of a housing price bottom spreads widely, some even worry that the expectation of house price increases, like a roly-poly toy, may have to be treated as a constant for the time being. Governor Lee pointed out the habit of economic stimulus through real estate, saying, "When a recession comes, the easiest thing to do first is to boost the real estate market and provide loans, which then increase again; when a boom comes, it slows down a bit, and when a recession comes again, it happens again. This happens in every country, and isn’t that what the experience of the past 30 years shows?" He repeatedly emphasized the need for policy determination not to fall into such temptations.