[BOK Focus] If House Prices Rise Further, Bank of Korea Faces Dilemma... Why It Took a Firm Stand on Household Debt

Lee Chang-yong Governor "If Household Debt Increases Further, We Will Respond with Interest Rates"
At the National Assembly Audit, Responsibility of the Bank of Korea Discussed Regarding Real Estate and Household Debt
If House Prices Rise and Household Debt Increases Later, Bank of Korea Will Also Bear the Burden

On the 23rd, at the Bank of Korea in Jung-gu, Seoul, Governor Lee Chang-yong is responding to a lawmaker's question during the National Assembly's Planning and Finance Committee's audit of the Bank of Korea.
[Photo by Yonhap News]

"It seems too early to judge that the policy has failed just because household debt has increased over the past two months."

Lee Chang-yong, Governor of the Bank of Korea, said this on the 23rd during the National Assembly's Planning and Finance Committee audit, responding to criticisms that the housing market is rebounding and household debt is surging due to conflicting policies between the Bank of Korea and the government. Although recent concerns about household debt have grown due to the Bank of Korea's consecutive base rate freezes and the government's easing of loan regulations, he explained that since the government is now tightening regulations again, the increase in housing prices and household loans is expected to stabilize going forward.

At the Bank of Korea audit held the previous day at the Bank of Korea headquarters in Jung-gu, Seoul, discussions on the recent rise in housing prices and household debt were major agenda items. Summarizing Governor Lee’s related remarks, it suggests that after the second half of the year, housing prices are likely to stabilize, and the increase in household loans may slow down. In fact, in response to lawmakers’ concerns about the rise in household debt centered on mortgage loans, Governor Lee repeatedly asked to "watch for a few more months."

Regarding the criticism from Democratic Party lawmaker Ko Yong-jin that the Bank of Korea missed the timing for deleveraging, he said, "Rather than judging now, we need to see the flow of household debt in October and November," and to a similar question from Democratic Party lawmaker Jung Tae-ho, he replied, "Household debt decreased for about six months from the end of last year but has risen for about two months; it is difficult to say the trend has completely changed based on that."

Although Governor Lee said that "it is difficult for the Bank of Korea to explicitly comment on housing price forecasts," he issued warnings to the so-called 'Yeongkkeul (borrowing to the max)' group both at the Monetary Policy Committee press conference on the 19th and at the audit the previous day, which can be interpreted as a conservative view on the overall real estate market situation and housing price trends, including Seoul.

From the Bank of Korea’s perspective, the continued rebound in real estate prices and the increase in transaction demand are inevitably burdensome. The sharp rise in real estate-related loans since April is mainly attributed to the government's various loan regulation relaxations and the introduction of the special Booming Housing Loan earlier this year, but there is a general perception that the Bank of Korea, which manages the macroeconomy, also bears significant responsibility.

During the audit, many opposition lawmakers criticized the Bank of Korea for failing to respond appropriately while the government eased loan regulations. Democratic Party lawmaker Hong Young-pyo said, "The U.S. Federal Reserve (Fed) and the European Central Bank (ECB) have clearly emphasized the possibility of prolonged high interest rates, but the Bank of Korea was passive, possibly due to coordination with the government," adding, "I think this resulted in the increase in household loans through real estate loans."

Lee Chang-yong, Governor of the Bank of Korea, is speaking at a press conference on the interest rate decision of the October Monetary Policy Committee held at the Bank of Korea in Jung-gu, Seoul on the 19th.
[Photo by Yonhap News]

In particular, Governor Lee said the day before that if household loans are not controlled, interest rate hikes would be considered. If such a situation occurs, there is a high possibility of criticism that the Bank of Korea missed the right timing to deleverage through monetary policy. Democratic Party lawmaker Yang Kyung-sook said, "The Bank of Korea delayed interest rate hikes six times and missed the opportunity, but now that household debt has skyrocketed, if they raise rates, the public will fall from debt hell into a debt inferno."

Opinions are divided in the market and academia regarding the Bank of Korea’s responsibility. The Bank of Korea’s position is that since the consumer price inflation rate has continuously declined from January to July this year, it has decided to hold the base rate for now while leaving open the possibility of additional hikes depending on future inflation and household debt trends. However, many argue that the rare opportunity for deleveraging was missed. At a forum held by the Seoul National University Distribution Justice Research Center on the 20th, Woo Seok-jin, a professor of economics at Myongji University, said, "The Bank of Korea missed the timing to raise rates because it was overly cautious about the fiscal authorities."

Although Governor Lee expressed his intention to manage household debt through monetary policy, it is not easy to actually raise interest rates. With South Korea’s economic growth rate expected to be around 1-2% this year and next, raising rates could further slow the recovery by depressing private consumption. Governor Lee also said that solving household debt through monetary policy "incurs high costs" and did not specify concrete plans such as how much household debt must increase before considering a rate hike.

Instead, Governor Lee revealed his intention to resolve real estate prices and household loans through micro policies by recommending the government strengthen regulations to slow household debt growth. He emphasized the need to strengthen the Debt Service Ratio (DSR) regulation, saying, "The proportion of borrowers subject to the current DSR regulation is small," and regarding additional capital contributions by the Bank of Korea to the Korea Housing Finance Corporation, he said, "There is no need to do so."